Deman Supply: What Is It and Why Is It Central to Investing

When it comes to making stock trading decisions, we often hear investors and analysts mention demand and supply as the main drivers of prices. But if you don’t truly understand what they are and how they work, you might miss good investment opportunities or make wrong decisions when prices change. This article will clarify the confusion and help you understand the fundamentals of demand and supply in economics, and how investors can benefit from them.

Demand and Supply - The Basics You Need to Know

Before understanding how demand and supply affect prices, we need to clearly grasp these two terms.

Demand - The Desire to Buy

Imagine yourself: whenever the price of a stock drops, you want to buy more, right? Because you think it’s a good deal. This is demand — the desire to purchase a product (or stock) at various price levels.

When you plot price against the quantity people want to buy on a graph, you get the demand curve, which clearly shows that at 100 baht, 1,000 shares are wanted, but at 50 baht, 3,000 shares are wanted.

Basic Law of Demand:

• High price → fewer people want to buy
• Low price → more people want to buy

There are two main reasons for this:

Income Effect: When prices fall, your purchasing power increases, so you have more money to buy stocks in larger quantities.

Substitution Effect: When this stock’s price drops, it becomes more attractive compared to other stocks at the same price, so you prefer to buy this one.

Many other factors influence demand, not just price, such as your income, other stock prices, preferences, total number of investors, future price expectations, seasons, government policies, technology, and even your confidence.

Supply - The Desire to Sell

On the other side, sellers have the same principle. When stock prices rise, sellers want to sell more; when prices fall, they prefer to hold more.

Supply is the desire to sell at various price levels. Plotting price against the quantity sellers want to offer yields the supply curve.

Basic Law of Supply:

• High price → more sellers want to sell
• Low price → fewer sellers want to sell

This is because higher prices mean higher profits. Other factors affecting supply include production costs, prices of substitute products, competition, technology, future price expectations, weather, tax policies, exchange rates, and access to capital.

Equilibrium - The Price That Sets Itself

If we only consider demand or supply alone, we can’t determine the actual stock price. But when we plot both demand and supply on the same graph, their intersection point is called equilibrium. At this point, the price and quantity stabilize.

Why?

• If the price rises above equilibrium: sellers want to sell more, buyers want to buy less, leading to excess supply, so the price drops back to equilibrium.
• If the price drops below equilibrium: buyers want to buy more, sellers want to sell less, leading to excess demand, so the price rises back to equilibrium.

Demand and Supply in Financial Markets - More Complex Factors

In real stock markets, things are more complicated because many factors influence demand and supply simultaneously.

Factors Increasing Demand for Stocks

• Economic Conditions: When the economy expands, people want to invest more; during downturns, demand decreases.
• Interest Rates: When banks offer low interest rates, people turn to stocks for better returns.
• Money Supply: More money in the system means more buying power.
• Market Confidence: Positive news and optimistic outlooks boost demand.

Factors Affecting the Quantity of Stocks in the Market

• Corporate Decisions: Small companies issuing new shares increase supply; buybacks reduce it.
• New Listings: IPOs add to the total number of available shares.
• Regulations: Rules like the “Silent Period” after IPOs prevent large shareholders from selling, controlling supply.

How Demand and Supply Affect Stock Prices

When people say “the stock price is rising,” what truly drives this is demand and supply.

From Fundamental Analysis Perspective

Good news about a company, like higher-than-expected profits, increases investor interest. People want to buy more, and sellers may hold back, expecting higher prices. The result? The stock price goes up.

Conversely, bad news causes investors to sell more, while buyers hold back, leading to excess supply and a price decline.

From Technical Analysis Perspective

Traders analyze demand and supply through tools like candlestick charts and support/resistance levels.

• Green candlestick: closing price higher than opening — buyers dominate, price likely to rise.
• Red candlestick: closing price lower than opening — sellers dominate, price likely to fall.
• Support level: a price zone where buyers are eager to step in; prices tend to bounce back here.
• Resistance level: a zone where sellers are waiting; prices often reverse downward after reaching it.

Demand and Supply Zones - Practical Trading Techniques

Modern traders often use the Demand Supply Zone technique to identify good entry and exit points. This involves spotting rapid price movements (indicating excess demand or supply) followed by consolidation, then waiting for the price to break through these zones.

Pattern 1: Reversal after Consolidation

Drop Base Rally (DBR): Price drops sharply → consolidates → then moves upward.

Scenario: Excess supply causes a quick drop. When the price becomes very low, buyers see an opportunity and step in, leading to a bounce and eventual breakout above resistance.

Rally Base Drop (RBD): Price rises sharply → consolidates → then moves downward.

Scenario: Excess demand pushes prices up quickly. When the price reaches a high point, sellers appear, leading to a reversal and a breakdown below support.

Pattern 2: Continuation after Consolidation

Rally Base Rally (RBR): Price rises → consolidates → then continues upward.

Scenario: Strong demand pushes prices higher. After a pause, positive news or continued buying drive the price further up.

Drop Base Drop (DBD): Price drops → consolidates → then continues downward.

Scenario: Strong supply causes prices to fall. After a pause, negative news or selling pressure drive prices lower.

Summary - Why You Must Understand Demand and Supply

Demand and supply are not just economic theories in textbooks; they are the real forces behind daily stock price movements. Whether you analyze stocks fundamentally (news, earnings) or technically (charts, candlesticks), the core driver remains demand and supply.

By understanding how buying and selling forces work, you can:

• Better predict price directions
• Make more rational trading decisions
• Avoid emotional or impulsive choices

The key is not just studying this theory but applying it by analyzing real stock prices, reviewing your insights, and practicing. Continuous practice will deepen your market understanding and help you become a smarter investor.