Why do investors need to understand "demand and supply" to profit from the stock market

Have you ever wondered what rules cause stock prices to go up and down? The answer is simple — it is determined by demand and supply operating in tandem. Once you understand this fundamental principle, you can read the market as easily as reading a book.

How traders utilize demand and supply

Finding the right timing to buy and sell stocks starts with understanding the basic driving forces: buying pressure (Demand) and selling pressure (Supply)

When buying pressure is strong, buyers are willing to pay higher prices to acquire shares. Meanwhile, weak selling pressure results in prices rising continuously. Conversely, when selling pressure floods the market, sellers are willing to lower prices to offload their shares, causing prices to fall rapidly.

This analysis is not guesswork but a study of a system that operates according to definite rules.

What is demand?

Demand refers to the desire to purchase goods or services at various price levels. When plotted on a graph, this forms the Demand Curve (Demand Curve), which slopes downward from left to right — this is the law of demand.

The law of demand states: When prices rise, the quantity demanded decreases; when prices fall, the quantity demanded increases.

There are two reasons:

1. Income effect — When prices drop, your purchasing power increases, allowing you to buy more.

2. Substitution effect — When a product becomes cheaper, you tend to stop using other products and switch to this one.

Besides price, demand also depends on: consumer income, substitute goods’ prices, tastes, the number of consumers, and future price expectations.

What is supply?

Supply refers to the willingness to sell goods or services at various price levels. Unlike demand, supply moves in the same direction as price.

The law of supply states: When prices rise, sellers want to offer more because profits increase. Conversely, when prices fall, sellers may reduce production or offerings.

Factors influencing supply include: production costs, prices of alternative goods, number of competitors, technology, and future price expectations.

Equilibrium point — where prices decide

Actual market prices do not result from demand or supply alone but occur at the (Equilibrium Point) — where the demand and supply curves intersect.

At this point, the quantity buyers want to buy equals the quantity sellers want to sell. Prices return to balance and tend to stabilize.

But if prices change:

• Higher than equilibrium → sellers want to sell more, buyers want less → inventory increases → downward pressure on price
• Lower than equilibrium → buyers want more, sellers want less → shortages occur → upward pressure on price

The market tends to move back toward equilibrium all the time.

Demand and supply in the financial markets — much more complex

Stocks and financial assets are also commodities, but the factors affecting demand are much more complex.

Factors driving stock demand:

• Macroeconomics: economic growth, inflation rate, interest rates. When interest rates are low, investors turn to higher returns in the stock market.
• Liquidity: the amount of money in the system. Higher liquidity increases investment demand.
• Investor confidence: forecasts about company performance, economic conditions, government policies. These psychological factors greatly influence trading.

Factors affecting stock supply:

• Share issuance policies: IPOs of new companies, capital increases, share buybacks — all change the total shares available in the market.
• Regulatory requirements: restrictions on sales, silent periods, etc., impact share offerings.

How traders use demand and supply for technical analysis

1. Price Action — Reading candlesticks

Green candlestick (Close above open) = Buying pressure wins = high chance of continuing upward movement

Red candlestick (Close below open) = Selling pressure wins = high chance of continuing downward movement

Doji (Open and close are the same) = Equal strength on both sides = unclear, wait for new factors

2. Trend analysis

Prices making new highs = Strong demand = Uptrend

Prices making new lows = Strong supply = Downtrend

Prices oscillating within a range = Balanced demand and supply = Wait for a breakout

3. Support and resistance levels

Support = Price level where demand is waiting to buy (Lower price, buyers become more interested)

Resistance = Price level where supply is waiting to sell (Higher price, sellers become more interested)

Demand Supply Zone strategy — advanced trading technique

Professional traders use the Demand Supply Zone technique to identify entry points with high success rates.

Method 1: Reversal (Reversal)

DBR (Drop Base Rally) — downtrend reverses upward

• Price drops (Drop) due to heavy selling
• Pauses in a range (Base) as buying begins to appear
• Rises again (Rally) as buying wins
• Entry point: breakout above the range

RBD (Rally Base Drop) — uptrend reverses downward

• Price rises (Rally) due to heavy buying
• Pauses in a range (Base) as selling begins to appear
• Falls (Drop) as selling wins
• Entry point: breakout below the range

Method 2: Continuation (Continuation)

RBR (Rally Base Rally) — uptrend continues

• Price moves up (Rally)
• Pauses in a range (Base)
• Continues upward (Rally)

DBD (Drop Base Drop) — downtrend continues

• Price drops (Drop)
• Pauses in a range (Base)
• Continues downward (Drop)

Example of correlation: which relates to the law of demand?

Consider the following:

• When stock prices decrease, more buyers are willing to stockpile → this shows that “the quantity demanded is inversely related to price” = this relates to the law of demand

• When stock prices increase, sellers offer more to make profits → this shows that “the quantity supplied is directly related to price” = this relates to the law of supply, not demand

Key takeaways

Demand and supply are not just economic theories — they are the language the market uses to communicate. Every time prices move, they tell us about imbalances between buyers and sellers.

Traders who understand this can predict price movements, set protective positions, and seize profit opportunities effectively, whether the market is rising or falling.