Why do stock prices change? What is the law of demand and what do traders need to know

Who has ever wondered why stock prices move wildly up and down? The answer lies in a simple yet powerful principle: Supply and Demand. This concept is not just for economists sitting and reading books, but a tool used daily by investors and traders to predict where prices are headed.

What is the Law of Demand? Basic Understanding

When it comes to the market, there are always two sides: people who want to buy and people who want to sell.

Demand represents the desire to buy at various price levels. If the price is low, more people want to buy. If the price is high, the willingness to buy decreases. This relationship is called the “Law of Demand” - Low price = increased demand and vice versa.

Factors affecting demand are not limited to price alone, including:

• Investors’ income (As they get richer, they dare to buy more)
• Market confidence (Good news creates enthusiasm)
• Comparison with other assets (If crypto is expensive, many choose to buy stocks)
• Expectations (People will buy now if they think prices will continue to rise)

Supply: The Other Side of the Coin

Meanwhile, sellers have their own characteristics.

Supply indicates the quantity that sellers want to put on the market. Unlike demand, where low price = increased desire, the law of supply states that High price = more willing sellers because they want to maximize profits.

Factors influencing supply include:

• Production costs (If a company has high costs, it won’t be eager to offer many shares)
• Number of new IPO companies (New companies entering the market increase supply)
• Management policies (Share buybacks reduce supply, capital increases raise supply)
• New technology (Makes production easier, so sellers are more willing to offer)

Equilibrium Point: Where the Market Stands Still

Think about it—when the demand and supply lines intersect at a certain point, that is the market equilibrium. At this point, the price and volume of stocks tend to stabilize.

But why is that?

When prices rise above equilibrium, sellers want to sell more, but buyers lose interest. The result: excess inventory, sellers must lower prices, and prices fall back.

When prices fall below equilibrium, buyers rush in, but sellers get tired of selling. The result: shortages, sellers become willing to raise prices.

Financial Markets: When Stocks Become a Demand and Supply Game

In the real world, demand and supply for stocks are not controlled by price alone. Macroeconomic factors such as interest rates, economic growth, and political rumors also play roles.

Demand in the stock market

When interest rates are low, lending is cheap, and money in the market is scarce. Investors prefer to chase higher returns, causing stock prices to bounce.

When company data is excellent, investor confidence rises. They want to hold more shares, demand spikes, and prices go up.

Supply in the stock market

Companies decide to IPO and sell new shares—supply increases, which can cause market fluctuations.

Companies buy back shares—supply decreases, a strong signal.

Major investors and executives reduce holdings (lock-up period ends)—many shares are sold simultaneously, increasing supply suddenly.

From Theory to Trading: Demand Supply Zone

Traders know that theory alone doesn’t help much unless applied as a tool. The “Demand Supply Zone” technique is created by detecting points where demand or supply weakens and marking those areas.

Candlestick reading: The war between buyers and sellers

Green candlestick (Close > Open): Demand wins, buyers take control, price jumps up.

Red candlestick (Close < Open): Supply wins, sellers dominate, price drops.

Doji candlestick (Open = Close): Both sides are equally strong, market waits, price remains steady.

Support and resistance levels

Support: Area with strong demand, buyers wait here. If the price drops to this level, buying occurs, preventing further decline.

Resistance: Area with heavy supply, sellers draw above this level. If the price rises to this point, selling occurs, preventing further rise.

Real Situations: 4 Trading Groups That Don’t Play Only Price

1. Demand Zone: When demand is fierce

DBR (Drop-Base-Rally): Price plunges rapidly (Drop) due to intense supply. Then buyers start to step in, and the price rebounds (Rally), signaling a buy.

RBR (Rally-Base-Rally): Price steadily moves upward, pauses briefly. Sellers appear, but after a while, demand returns strongly, and prices continue higher.

2. Supply Zone: When supply enters the game

RBD (Rally-Base-Drop): Price jumps up, sellers see high prices and offer to sell. Price plunges (Drop), signaling a sell.

DBD (Drop-Base-Drop): Price drops and then attempts to go lower. Sellers refuse to stop, and each dip gets lower.

Back to Thinking: Why Do Investors Need to Know Demand and Supply?

In reality, stock prices are not randomly chosen. They are driven by people’s demand. If you know “sellers are weak right now” or “buyers are still strong,” you have a reason to enter or exit at the right moment.

Analysts who are “serious” use models of the world, review quarterly data, decode GDP and economic levels. Traders who are “light” observe candlesticks, read charts, and look for patterns. Both methods use demand and supply, but from different perspectives.

The key for investors is: regardless of your approach, learning what the demand and supply law is and how to read demand and supply signals is one of the most essential tools.

Starting today, try tracking candlestick statistics, observe where buying strength is, where selling strength is, and when the market changes. Repeating this process will allow the data to speak to you.