Stock Trading 101: The Role of Supply and Demand

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At the most fundamental level, supply and demand in the market determine changes in stock prices.

All other factors put forward as reasons for the price change, such as the performance of the company, industry or sector, do not have a direct impact on prices.

What they do is affect whether or not to own or sell stocks. When some traders fulfill their desires during the trading session, this is when the price actually changes.

This changes the supply / demand balance and creates a market for other transactions at a different price level.

The law of supply and demand is king in any market. No matter how well a company performs, its stock price will go nowhere if there is no demand for it.

Likewise, a poorly performing company’s stock can skyrocket if market participants get excited about it for reasons that may not even be fundamental.

If a company surprises stock owners with low income, demand for stocks may weaken.

If this happens, the balance between demand and supply of the stock is altered. Future buyers will need a discount on the share price, and many sellers will need to be motivated to adjust to that price, regardless of the cause. More sellers than buyers means that the supply will exceed the demand, so the price goes down.

At some point, a stock’s price will drop enough for buyers to find it attractive. Many factors can change this dynamic.

As buyers enter the market for a stock, the demand increases faster than the supply and therefore the price increases.

Often, supply and demand strike a balance at a price that is acceptable to both buyers and sellers.

When supply and demand balance, so that they are roughly equal, prices will go up and down within a narrow price range.

There are many examples of stocks remaining in a flat range for days or months before an event upsets the supply / demand balance. This period is called consolidation.

If the demand for a stock exceeds supply, its price will increase. However, it will only increase to the point where buyers find the price attractive, after which demand will generally decrease.

Normally, lower demand will cause owners of shares to sell. As owners sell (for whatever reason) the price will drop as there is now more supply than demand. By lowering the price, sellers of a stock hope to encourage buyers. This dynamic works the same way when demand increases but in the opposite direction. As the price drops, it will reach a level where buyers will find the stock attractive and demand will increase.

When investors start buying, the share price will rise as more and more sellers need to be encouraged to sell their shares. The mechanics of supply and demand are the most important truth new investors need to learn about stock prices. It is the exchange between supply and demand that sets the price. The law of supply and demand is supreme in the market.

If stock prices are a direct result of demand and supply, then it follows that those who own many shares of a particular company or who have a lot of money are the ones who most influence the prices of stocks. actions.

Examples of such entities are institutions like mutual funds, pension funds, endowments, banks, insurance companies, and high net worth individuals.

These entities trade in sufficient volume to have an impact on stock prices. Their large transactions cause stock prices to go up or down, depending on how many and how quickly they buy or sell.

This is the reason why when institutions want to offload or buy a security, they have to do it slowly.

If they immediately flood the market with buy or sell orders, it will create huge supply or demand, respectively. This will lower or raise the price very quickly to their disadvantage.

Identifying stocks for institutional buying or selling is essential in locating stocks that are ready to make significant price movements.

Stocks with a large number of shares outstanding, in particular, need institutional support for their prices to move significantly.

Retail traders who trade small amounts of stocks will not move these stocks. To capitalize on this, what retailers can do is follow in the footsteps of institutions and buy or sell before them.

Charts are very useful for detecting institutional movements. How is this information useful to the investor and especially to the little one?

Are you looking for stocks with increasing demand? How do you know that? Watch trading volumes and volume based charts like OBV as well as momentum indicators.

If a stock is trading at an average daily volume of 200,000 and suddenly starts trading above that average, it indicates an increase in demand or supply.

Look at this stock! It can be directed downwards or upwards. It might be time to buy or sell. Consider other factors to see which direction it is likely to go. Start with a small amount before increasing your holding if signals of increasing demand continue to hold.

The writer is the author of The Ultimate Framework for Success in Shares. [email protected]

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