What is supply - its relationship with stock and asset price movements

Supply is the quantity of goods or services that sellers are willing to offer at various prices in the market. At the same time, demand is viewed as consumers’ willingness to purchase. These two forces are not just economic concepts but also the main drivers of price movements in investment markets, including stocks, Bitcoin, and other financial assets. A deep understanding of how these forces work can help investors make more effective decisions.

Market Basics - Supply and Demand

Market prices do not arise randomly or arbitrarily but result from the interaction between two forces: buyers wanting to purchase assets and sellers wanting to sell.

On the demand side, or buying force, buyers are willing to pay different prices. When prices are low, many buyers enter the market. As prices rise, the number of buyers tends to decrease. This is the law of demand, indicating an inverse relationship between price and quantity demanded.

On the supply side, or selling force, sellers increase the quantity they are willing to offer as prices go up because profits are higher. When prices fall, sellers tend to reduce their offerings. This is the law of supply, showing a direct relationship between price and quantity supplied.

Price Determination and Market Equilibrium

Actual market prices do not come from demand or supply alone but from the point where both forces balance, called equilibrium. At this point, the quantity consumers want to buy matches the quantity sellers are willing to sell.

When prices are above equilibrium, sellers supply more, but buyers purchase less. This leads to an increase in inventory and downward pressure on price. Conversely, when prices are below equilibrium, buyers want to buy more, but sellers offer less, resulting in shortages and upward pressure on price.

Factors Driving Demand and Supply

Factors Affecting Demand

Macroeconomic Conditions: When the economy is thriving, people’s incomes increase, and they are more willing to invest. Low interest rates also encourage investors to seek returns in the stock market.

Confidence and Expectations: Investors with positive outlooks are willing to pay higher prices to hold assets. If expectations turn negative, buying interest diminishes.

Financial System Liquidity: The amount of money available in the system affects investors’ ability to purchase assets.

Factors Affecting Supply

Corporate Policies: Decisions such as issuing new shares or buybacks directly influence the number of shares available in the market.

Production Costs: Changes in costs can lead sellers to adjust the quantity they are willing to offer.

New Company Listings: IPOs increase the total number of shares in the market, which can impact short-term price equilibrium.

Application in Stock Price Analysis

Fundamental Analysis

Fundamental analysts believe that long-term stock prices reflect the true value of a company. Factors such as earnings, profit growth, and macroeconomic conditions influence future profit expectations.

Good news or positive forecasts increase buyers’ willingness to pay higher prices and reduce selling pressure, pushing prices up. Conversely, bad news or negative outlooks decrease buying interest and increase selling, causing prices to fall.

Technical Analysis

Technical traders use various tools to measure buying and selling pressures.

Candlestick Charts: Show the relationship between opening, closing, high, and low prices over a period. Green candles (close > open) indicate strong buying, while red candles (close < open) indicate strong selling.

Trends: Higher highs suggest dominant buying pressure; lower lows suggest dominant selling pressure.

Support & Resistance: Support levels are where buying interest is expected to be strong; resistance levels are where selling interest is strong.

Trading Strategies Based on Supply and Demand

Trading Demand and Supply Zones - Reversal Points

Reversal to Uptrend (Drop Base Rally - DBR): Occurs when excess selling drives prices sharply down, then prices consolidate in a range as forces balance. When positive news or factors emerge, buying overtakes selling, breaking resistance and initiating an uptrend. Traders can buy at breakout points with stop-losses.

Reversal to Downtrend (Rally Base Drop - RBD): Happens when excess buying pushes prices higher, then consolidates. Negative news or factors cause selling to dominate, breaking support and leading to a downtrend. Traders can short at breakdown points with stop-losses.

Trading Demand and Supply Zones - Following the Trend

Continuing Uptrend (Rally Base Rally - RBR): Prices rise due to strong buying, then pause in consolidation. When buying strength resumes, prices continue upward in the same direction.

Continuing Downtrend (Drop Base Drop - DBD): Prices fall due to strong selling, then consolidate. When selling pressure resumes, prices continue downward.

Summary

Supply is an inseparable component of the market price system, working together with demand. Both long-term investors and short-term traders can leverage this understanding in their decision-making. Learning about supply and demand is not just theoretical; it requires applying knowledge to real market prices through practice and observation to truly grasp and utilize these concepts effectively.