Supply refers to: a key factor in determining stock prices and general investments

In the world of investing, understanding what supply means and how it relates to demand is a fundamental skill every investor should have. The driving force behind stock price increases or decreases comes from the balance between buyers and sellers—that is the core of the supply and demand theory.

Key Concepts of Supply and Demand

Demand refers to the desire to purchase goods, services, or securities at various price levels. Supply means the quantity of goods or securities that sellers are willing to offer at different prices. These two concepts work together like balancing scales.

When considering demand, buyers tend to show more interest when prices are low and pull back when prices rise. Conversely, sellers who understand supply know that higher prices motivate them to sell more, while lower prices lead them to reduce their offerings.

The law of demand states that when prices fall, demand increases, and vice versa—mainly due to two factors: income effects, where lower prices leave consumers with more disposable income, and substitution effects, where consumers seek cheaper alternatives.

Factors Influencing Market Demand

• Price levels
• Buyers’ income
• Prices of related goods
• Consumer preferences
• Number of buyers in the market
• Future price expectations
• Seasons and economic conditions
• Consumer confidence

Price Equilibrium: The Intersection of Buying and Selling Forces

Supply, in depth, is not just about the quantity of goods but about the market’s main balancing mechanism. When buying and selling pressures meet at a certain point, prices and trading volumes stabilize temporarily.

If prices are above equilibrium, sellers produce and offer more, but buyers hesitate, leading to excess inventory and downward pressure on prices. Conversely, if prices are below equilibrium, buyers are eager to purchase, but sellers are reluctant to sell, causing shortages and upward price movement. This is the market’s adjustment mechanism.

Factors Affecting Supply

• Price levels
• Production costs
• Prices of substitute goods
• Number of competitors
• Production technology
• Future price expectations
• Weather and natural disasters
• Fiscal policies

Drivers of Supply and Demand in Financial Markets

Stock markets are not just ordinary markets; they are complex because stocks reflect the value of companies.

Demand Factors in the Stock Market

Buyers’ desire to purchase stocks increases when interest rates are low, as they seek higher returns. Macroeconomic factors such as national growth, profit expectations, and investor confidence influence buying decisions. Additionally, financial system liquidity (money supply) directly affects investors’ purchasing power.

Supply Factors in the Stock Market

Supply in the stock market includes corporate policies like issuing new shares or buybacks, the listing of new companies (IPOs), and regulations from stock exchanges. For example, restrictions like the Silent Period after an IPO limit major shareholders from selling shares, affecting supply.

How to Use Supply and Demand Analysis for Stocks

Investors can apply this understanding in two ways: fundamental analysis and technical analysis.

Fundamental Analysis from a Supply and Demand Perspective

When stock prices rise, it may indicate strong buying pressure; when they fall, selling pressure dominates. However, fundamental analysts see this demand as driven by other factors: earnings expectations, future growth, or restructuring.

Positive earnings news encourages buyers to purchase at higher prices, while sellers become hesitant, pushing prices up. Conversely, negative news causes buyers to hold back and sellers to accelerate sales, leading to price declines.

Technical Analysis Using Various Tools

1. Price Action and Candlestick Charts

Green candles (closing higher than opening) indicate buying strength during that period. Red candles (closing lower) show selling pressure. Doji candles (opening and closing prices close) suggest a balance between buyers and sellers.

2. Trend Analysis

Higher highs indicate bullish momentum; prices tend to continue upward. Lower lows suggest bearish momentum.

3. Support & Resistance Levels

Support levels are price points where buying interest is strong enough to prevent further declines. Resistance levels are points where selling interest caps upward movement.

Demand and Supply Zone Trading Techniques

This popular technique involves identifying areas where supply and demand are imbalanced and waiting for the price to return to these zones.

Reversal Trading (Turning Points)

DBR (Demand Zone Drop Base Rally): Occurs when heavy selling causes a rapid price drop, followed by a consolidation (base). When positive factors emerge, the price breaks above the base and continues upward.

RBD (Supply Zone Rally Base Drop): Happens when strong buying pushes prices up quickly, then consolidates. Negative factors then cause the price to break below the base and decline.

Continuation Trading (Trend Following)

RBR (Rally Base Rally): Price rises, consolidates, then continues upward—indicating ongoing bullish momentum.

DBD (Drop Base Drop): Price drops, consolidates, then continues downward—indicating ongoing bearish momentum.

Summary

Supply is not just about the quantity of goods but a key market driver working alongside demand to determine prices and trading volumes. Investors who understand this balance can better predict price movements and identify optimal entry and exit points. Although the principles of supply and demand are simple, applying them effectively requires continuous observation, study, and testing based on real market movements.