Demand is the primary mechanism driving prices in the market.

In studying economics, we find that demand is one of the most fundamental concepts because it forms the basis for price determination. Many investors often overlook the importance of truly understanding what demand is and how it relates to stock price movements. This article will help you understand this mechanism more deeply.

The True Meaning of Demand, Supply, and Their Importance in Price Setting

Actually, demand is the desire to buy goods, while supply is the desire to sell. These two phenomena may seem simple, but they are deeply interconnected in determining prices. When we analyze further, we find that these are not just raw numbers but involve the flow of minds and decision-making processes of buyers and sellers behind the scenes.

Understanding the behavior of demand and supply is key to creating market equilibrium—that is, the numbers that cause stock prices to continually adjust.

What Is Demand: Consumer Desire and Behavior

Demand is the desire to purchase goods or services at various price levels. Investors might think this only relates to the number of green candlesticks on a chart, but in reality, it’s much more complex.

When we plot this demand on a graph, with quantity on the horizontal axis and price on the vertical axis, we get the demand curve, which shows an inverse relationship: the higher the price, the fewer people want to buy; conversely, when prices drop, more buyers emerge.

The Law of Demand: The Inverse Relationship That Determines Price

The law of demand states that the desire to buy a product is inversely related to its price. Why is this the case? There are two main reasons:

Income Effect - When prices fall, consumers with the same budget can buy more, increasing their purchasing power.

Substitution Effect - When the price of this product decreases, it becomes a more attractive option compared to similar products, leading more people to switch and buy this one.

In the stock market, this means that when the price of a stock drops, investors see it as an opportunity, and buy orders increase.

Factors Affecting Investor Demand

Beyond price, several other factors influence investors’ buying decisions:

Macroeconomic Factors - Interest rates, economic growth, inflation—all affect how much money investors are willing to allocate to stocks.

Liquidity in the Financial System - The amount of circulating money directly impacts the number of buyers.

Investor Confidence - Group psychology: when people believe the economy will improve, they are more willing to buy stocks; fear, on the other hand, quickly reduces demand.

Future Price Expectations - If investors think prices will rise, they buy now to avoid missing out.

Market Tastes and Sentiments - Seasons, trends, new technologies—all influence buying patterns.

What Is Supply: Seller Desire and Power

If demand is the motivation of buyers, supply is the motivation of sellers. When plotting the quantity of shares offered at various prices, we get the supply curve, which is generally opposite to the demand curve.

The Law of Supply: The Same-Direction Relationship

The law of supply states that as prices increase, sellers are more willing to sell more because profits grow. Conversely, when prices fall, sellers tend to hold back, possibly waiting for better prices.

Factors Influencing Supply in Financial Markets

Production Costs - Operating costs, exchange rates, raw material prices all affect the willingness of management to sell shares.

Company Policies - Share buybacks reduce supply, while issuing new shares increases supply.

Initial Public Offerings (IPOs) - New companies entering the stock market add to the available supply.

Regulations and Rules - Stock exchange regulations influence how many shares can be offered.

Technology and Environment - Changes in climate, natural disasters, or technological advances can alter production capacity.

Market Equilibrium: The Price-Setting Point

Merely demand and supply alone cannot determine the market price. When the demand and supply curves intersect, that is equilibrium, and the actual market price is established.

At this equilibrium point, prices and trading volumes tend to remain stable because:

• When prices rise above equilibrium, excess supply occurs as sellers outnumber buyers, pushing prices back down.

• When prices fall below equilibrium, excess demand occurs as buyers outnumber sellers, pushing prices back up.

This explains why stock prices tend to fluctuate around the true equilibrium.

Demand and Supply in Fundamental Analysis

In fundamental analysis, investors don’t see demand and supply as just a game with stocks but as indicators of the true value of a company.

When news suggests good earnings, investors increase profit expectations, boosting demand; they are willing to pay higher prices. Conversely, negative news reduces demand.

Fundamental demand and supply reflect investors’ expectations about the future value of the company.

Demand and Supply Indicators in Technical Analysis

In technical analysis, traders use various tools to measure and detect demand and supply:

1. Candlestick Analysis

Green candles (close > open) indicate buyers winning, signaling strong demand. Red candles (close < open) suggest strong supply.

Doji candles, where open and close are nearly equal, indicate a balance between demand and supply—no clear dominance.

2. Price Trend Evaluation

If prices continually make new highs, demand remains strong. If prices make new lows, supply is dominant.

Uptrend = strong demand
Downtrend = strong supply
Limited movement = fake demand and supply

3. Support and Resistance

Support is a price level with high demand, where many investors believe the price is low and are willing to buy, preventing it from falling further.

Resistance is a price level with high supply, where many see the price as high and are willing to sell, preventing it from rising further.

Demand Supply Zone Technique: From Theory to Real Trading

Demand Supply Zones apply basic demand and supply principles to identify entry and exit points. When price moves rapidly away from a zone and pauses before continuing, that pause is called a “zone.”

Reversal

Demand Zone Drop Base Rally (DBR) - Price drops sharply (Drop), consolidates in a base, then reverses upward (Rally) as buying strength returns.

Supply Zone Rally Base Drop (RBD) - Price rises sharply (Rally), consolidates, then reverses downward (Drop) as selling pressure resumes.

Traders can enter trades when price breaks through these zones.

Continuation

Demand Zone Rally Base Rally (RBR) - Price continues upward, consolidates, then moves higher, indicating strong demand.

Supply Zone Drop Base Drop (DBD) - Price continues downward, consolidates, then drops further, showing strong supply.

Both setups offer opportunities to follow existing trends.

Summary

Demand is the fundamental market driver, indicating how many people want to buy or sell and thus setting the price. Understanding what demand truly is helps investors better predict price directions—whether through fundamental analysis (future company value expectations) or technical analysis (reading buy/sell signals on charts). Both rely on the principles of demand and supply.

Learning this isn’t difficult but requires practice—observing real market prices, noting when demand or supply increases or changes, which is key to more effective investing.