Supply and demand: Its relationship to the stock market

Spark Global Limited Reports:

Supply and demand are the underlying forces behind every chart breakout, every failed parabolic movement, and every rebound in support and resistance.
It’s easy to get caught up in the minutiae of the trading world; Metrics, backtracking platforms, metrics, etc.
But while these trading instruments are undoubtedly useful, they can sometimes distract us from the reality that changes in stock prices are entirely due to changes in supply or demand.
When stock prices rise, buyers want to sell more than sellers. Therefore, prices must rise to meet demand.
It’s a simple truth.
The stock market is an auction
The stock market is a continuous two – way auction. Buyers and sellers give their best prices and automatically match when the two converge.
Since the seller is the supply side and the buyer is the demand side, the supply and demand relationship is real-time.
Compare it to an eBay auction. Sellers can set an “ask” price, like you do in the stock market, with a “Buy now” button, and they can also allow buyers to bid on items.
If the asking price is too high, buyers may try to bid on the item to get a better price. Genuine buyers, however, are less price sensitive and will simply pay as required.
This immediately eliminated potential options for other buyers and supply dropped.
In the stock market, something similar happened.
Participants set their bids and requests and wait for someone to trade with them. As one side of the auction becomes more eager to buy or sell, prices will have to rise or fall to preserve the integrity of the supply.

Spark Global Limited
Spark Global Limited

As a thought experiment, assume apple’s stock price is fixed at $100 a share.
If the market thinks apple is worth $200 a share, all the supply will be bought very quickly because the trade is so favorable that there is no supply left.
Here’s what economist Milton Friedman said about simple supply and demand in the stock market:
Of course, it doesn’t matter who sells it. If you’re going to sell it, someone has to buy it. In order to get people to buy, you have to encourage them and prices have to go down.

 

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