Demand and Supply: Differences and Applications in Financial Markets

When it comes to price movements in financial markets, we often hear the terms “demand” and “supply,” which are fundamental concepts that drive the prices of all assets. But how do demand and supply differ, and how can investors leverage them? Let’s understand this to improve investment decision-making.

Demand and Supply: Basic Definitions

Demand (Demand) refers to the desire to buy goods or services at various price levels. When this desire is plotted to show the relationship between price and quantity, it results in a demand curve that illustrates how much consumers are willing to buy at each price level.

Supply (Supply) at that moment refers to the willingness to sell goods or services at various price levels. The supply curve shows the quantity that sellers are willing to offer at each price.

The fundamental difference is: demand is driven by buyers, while supply is driven by sellers.

The Law of Demand and Supply: Inverse Relationship

Law of Demand indicates that when prices increase, the quantity demanded decreases (Inverse), and when prices decrease, demand increases. For example, when a product’s price rises, consumers hesitate and buy less.

This is caused by two effects:

• Income Effect (Income Effect): When prices fall, consumers’ purchasing power increases.
• Substitution Effect (Substitution Effect): When prices decrease, the product becomes more attractive compared to similar alternatives.

Law of Supply states that the relationship between price and quantity supplied is direct: higher prices → more willingness to sell; lower prices → less quantity supplied.

Factors Influencing Demand and Supply

###Factors Affecting Demand:

• Consumer income
• Preferences and choices
• Prices of substitute goods
• Number of consumers
• Future price expectations
• Seasons and special events

###Factors Affecting Supply:

• Production costs
• Technology
• Number of producers
• Prices of other goods that producers can make
• Weather and natural disasters
• Tax policies and price controls
• Future price expectations

Equilibrium: The Point of Market Decision

Equilibrium (Equilibrium) is the point where demand and supply curves intersect. At this point, the quantity consumers want to buy equals the quantity sellers want to sell, and the price is called the equilibrium price.

If the price rises above equilibrium: supply exceeds demand → surplus → sellers are forced to lower prices.

If the price falls below equilibrium: demand exceeds supply → shortage → buyers are willing to pay more.

This mechanism tends to bring prices back to equilibrium naturally.

Factors Determining Demand and Supply in Financial Markets

In stock and financial asset markets, demand and supply are influenced by more complex factors:

Demand factors:

• Interest rates: low interest rates = investors seek higher returns in stocks
• Liquidity: more money in the system = increased demand for stocks
• Confidence: positive economic outlook and strong earnings = higher demand

Supply factors:

• Corporate policies: issuing new shares or buybacks affect supply
• New IPOs: new companies listing increase supply
• Regulations: restrictions on selling shares impact supply

Applying Demand and Supply Analysis to Stock Price Movements

Fundamental Analysis Method

Stock prices reflect demand and supply movements. When good news comes out, investors buy more (Demand increases) → prices rise. When bad news appears, investors sell off (Supply increases) → prices fall.

Technical Analysis Method

Technical analysts use tools to interpret buying and selling pressures:

1) Price Action (Price Movements)

• Green candlestick = buying pressure wins = strong demand
• Red candlestick = selling pressure wins = strong supply
• Doji = balance between buyers and sellers = no clear direction

2) Trend (Trend)

• Prices making higher highs = demand remains strong = uptrend continues
• Prices making lower lows = supply remains strong = downtrend continues

3) Support & Resistance (Support & Resistance)

• Support = price level where demand is waiting to buy
• Resistance = price level where supply is waiting to sell

Trading Strategies in Demand and Supply Zones

1. Demand Zone Drop Base Rally (DBR) - Downtrend then reversal upward

Occurs after heavy selling pushes price down (Drop), then selling weakens, forming a base (Base), until buying interest pushes price back up (Rally). Traders can buy at breakout points.

2. Supply Zone Rally Base Drop (RBD) - Uptrend then reversal downward

Happens when strong demand pushes prices higher (Rally), then buying weakens, forming a base (Base), until selling pressure exceeds buying, causing price to fall (Drop). Traders can sell at breakout points.

3. Rally Base Rally (RBR) - Continued uptrend

A pause in the trend: price rises, forms a base, then continues upward, indicating demand persists.

4. Drop Base Drop (DBD) - Continued downtrend

A pause in the downtrend: price falls sharply, forms a base, then continues downward, indicating supply remains.

Summary

Demand and supply are not only economic concepts but practical tools that investors can use to analyze stock and asset prices. Understanding the differences between demand and supply, and the factors influencing both, can lead to more accurate investment decisions.

However, theoretical knowledge must be combined with practical application in market analysis to clearly visualize and effectively implement trading strategies.