Demand is the primary force driving stock prices — how should investors understand this?

For investors, understanding that demand is a key factor is not just a matter of economic theory but a crucial tool for predicting the price movements of the assets you hold. In the stock market, stock price movements may seem random, but they are actually controlled by an invisible yet felt force — that is, demand and supply, or the selling pressure. Grasping these two factors will help you analyze the market more deeply.

Basic Understanding: Demand and Market Buying Pressure

Demand is the desire to buy goods or services at various price levels. When plotted on a graph, the demand curve shows how much buyers are willing to purchase at different prices. Simply put, demand is the buying force in the market — the amount of money investors are willing to spend to own an asset.

The fundamental law of demand states that when prices rise, the quantity demanded decreases; conversely, when prices fall, demand increases. Why is this? Because of two psychological and economic effects on buyers:

First, Income Effect — When prices drop, your purchasing power increases, making you feel richer, so you are willing to buy more.

Second, Substitution Effect — When the price of one asset decreases, it appears more attractive than other assets, so you tend to switch and buy this cheaper alternative.

In the stock market, demand for shares depends on many factors: earnings forecasts, investor confidence, liquidity in the financial system, interest rates, and even economic outlooks. If news suggests that a company you’re interested in will grow significantly, everyone wants to buy, pushing demand up and prices higher.

Supply and Selling Pressure — The Other Side of the Price Equation

If demand is the buying force, then supply is the selling force — the volume of goods or services that sellers are willing to put on the market at various prices. The law of supply is opposite: when prices increase, sellers want to sell more because they can make higher profits; when prices decrease, they prefer to sell less.

In the stock market, supply depends on company decisions: whether they issue new shares (dilution), buy back their own shares (buyback), or if new companies go public (IPO). Changes in legal regulations or access to capital also influence supply.

When you see news like “Company A repurchases 1 billion baht worth of shares,” it indicates that the supply of that stock in the market will decrease, often signaling a positive outlook to investors.

Price Equilibrium — The Intersection of Two Forces

The current market price is not determined solely by demand or supply alone but by the point where the demand and supply curves intersect — called equilibrium.

At this equilibrium point, the price and trading volume tend to stabilize because of their “self-correcting” nature:

• If the price rises above equilibrium, sellers want to sell more, but buyers become less willing, leading to a slowdown in sales and a price correction downward.

• If the price falls below equilibrium, buyers step in more aggressively, but sellers are reluctant to sell at lower prices, causing shortages and a price rebound.

This is why markets rarely stay at the same price for long — new factors constantly influence supply and demand, causing the equilibrium to shift.

Factors Driving Demand in the Stock Market

Price isn’t the only factor affecting demand; other elements investors should observe include:

Macroeconomic Factors: When interest rates are low, investors seek higher returns elsewhere, increasing demand for stocks. Economic expansion boosts confidence and investment appetite.

Liquidity: When the financial system has abundant money, investors are more willing to invest; when liquidity tightens, they may need to sell assets.

Market Confidence: The most critical factor — if investors feel confident, they buy; if they fear downturns, they sell.

Earnings and News: News about a company’s potential losses or gains immediately impacts demand.

Financial Markets Are Different — Factors Determining Supply

Unlike agricultural markets where supply depends on weather and seasons, stock market supply is influenced by very different factors:

Corporate Policies: Decisions by company boards — whether to buy back shares or issue new ones — directly control supply.

New Listings: IPOs introduce new shares, increasing supply.

Regulations: “Silent Periods” after IPOs restrict major shareholders from selling, but once ended, supply can surge.

Other factors like production costs, future price expectations, and competitors also influence sellers’ decisions.

Applying Demand and Supply Principles to Stock Analysis

When considering stocks as “commodities,” investors can analyze them from both perspectives:

Fundamental Analysis: When analysts forecast strong earnings, investor confidence rises, increasing demand and pushing prices higher. Conversely, declining profits reduce demand.

Technical Analysis: Traders observe buying and selling pressures through tools like candlestick charts — green candles (closing higher than opening) indicate strong demand; red candles suggest supply dominance.

They also analyze support and resistance levels — support is where demand is strong enough to prevent further price drops; resistance is where supply prevents prices from rising further.

Real Trading Example — Demand Supply Zones Investors Should Know

The Demand Supply Zone technique uses this principle to identify entry and exit points. Traders look for significant imbalances in demand or supply, expecting that after a pause, prices will return to equilibrium.

Pattern 1 — Rebound Upward (Demand Zone): Price drops sharply due to excess supply (drop). When sellers are exhausted, the price consolidates in a base. Buyers waiting at low prices step in, and with positive news or renewed buying, the price breaks above the base and rallies — a buy signal.

Pattern 2 — Reversal Downward (Supply Zone): Price rises sharply due to excess demand (rally). When buyers are exhausted, the price consolidates. Sellers waiting at high prices start selling, and with negative news or renewed selling pressure, the price breaks below the base and drops — a sell signal.

Advanced traders use this method to avoid false signals and market traps.

Summary

All of this illustrates that demand is the desire to buy, and supply is the willingness to sell. When both meet, prices are formed. By understanding which force is dominant at any moment—through studying factors and analysis tools—investors can better predict price movements.

Learning this principle is not difficult if you want to apply it. Just remember: whenever prices change, there is a reason rooted in demand or supply. Recognizing that reason is the key to reading the market.