Why do stock prices go up and down like that? Understanding supply and demand can help you figure it out.

Anyone who has ever looked at a stock chart and wondered why prices move unpredictably, the answer lies in buying and selling pressure. In other words, it’s the demand meaning of trading.

The market does not move randomly

When stock prices spike suddenly, it’s not due to luck but because more people want to buy than sell. Conversely, when prices plummet, it indicates that the selling pressure is much stronger. These are the basic principles that traders use every day.

What is demand?

Demand is the desire of people to buy. When prices are low, people tend to want to buy more. When prices are high, demand decreases. This is the law of demand meaning—simple but powerful—where this desire is influenced by several factors:

• Income effect: When prices drop, our money can buy more, so we buy more.
• Substitution effect: When this product becomes cheaper, people tend to switch from other products to buy this one.
• Confidence: If the economy looks good, people have more money to invest.
• News: Good news encourages buying; bad news encourages selling.

What is supply?

Supply is the quantity of goods or stocks that sellers are willing to offer. Factors influencing supply include:

• Cost: If costs are high, people are reluctant to sell at low prices.
• Competition: More competitors increase supply.
• Policies: Share buybacks or capital increases can change supply.
• Technology: New technology may enable producing more or less.

Where does price originate?

The price we see in the market is established at the equilibrium point, where the demand curve intersects with the supply curve. At this point, demand meaning creates balance.

If prices rise slightly above this point, sellers will offer more, and buyers will hold back, leading to excess inventory and a price decrease. If prices fall too low, buyers want more, sellers reduce supply, leading to shortages and a price increase.

This automatic self-correction characterizes an efficient market.

In financial markets, what drives demand?

Macroeconomic factors: Low interest rates make bonds less attractive, shifting investment toward stocks.

Liquidity: Increased money supply in the system means investors have more funds to invest.

Investor confidence: If profits are expected to grow, everyone wants to hold those stocks.

In financial markets, what drives supply?

Corporate policies: Share buybacks reduce supply; capital increases expand supply.

New IPOs: New companies entering the market increase supply.

Regulations: Securities regulations like Silent Periods restrict large shareholders from selling.

How do traders use this?

Demand Supply Zone Technique

Traders don’t just look at prices but observe the movement of buying and selling pressure. Strong buying often appears in low-price areas called Demand Zones, while strong selling appears in high-price areas called Supply Zones.

Demand Zone Drop Base Rally (DBR)
Prices fall sharply due to excessive selling, then pause as buying pressure enters (Base). When good news arrives or circumstances change, prices surge. Traders buy at the breakdown point and set stop-losses below.

Supply Zone Rally Base Drop (RBD)
Prices rise from excessive buying, then pause as selling pressure enters (Base). When bad news or poor data come out, prices fall. Traders sell at the breakdown of support levels.

Trend Trading

Demand Zone Rally Base Rally (RBR)
Demand remains strong, and prices continue upward (Rally). After a brief pause (Base), prices rally again. Those who trade here often find the trend to be their friend.

Supply Zone Drop Base Drop (DBD)
Supply remains strong, and prices decline (Drop). After pausing (Base), prices continue downward. The trend is clearly bearish.

What is the truth?

Once you understand that demand and supply are the market’s driving forces, you will see that prices are not just numbers but reflections of the collective investor sentiment. Those who can read these numbers accurately can better predict the next price move. But remember, demand meaning in the market constantly changes; new factors can cause everything to shift at any moment.