Supply and Demand Concept in Stocks: Complete Beginner's Guide
•By Siti Afizah Rincing
Artikel ini juga tersedia dalam Bahasa Melayu
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Greetings and welcome, everyone.
Hi there!
Wishing you good health and happiness always with your loved ones.
In this article, I would like to share some knowledge about supply and demand in stocks.
As we know, these two concepts are well-established in the world of commerce and business.
The price of goods is certainly closely tied to supply and demand.
When demand is high and supply is low, the price of goods will rise.
But how does this concept apply in the world of stocks?
Let us explore this together.
Before we dive into supply and demand in stocks, let me ask you a question first.
Have you heard of this concept before?
Where did you first come across it?
When we relate it to the stock market, where do we find this concept?
This concept actually comes from the theory of the 3 Fundamental Laws of Wyckoff.
What are the 3 laws?
In simple terms, when a stock has high demand and at the same time low supply, the stock price will rise.
Conversely, when a stock has low demand and at the same time high supply, the stock price will fall.
Let us understand this in greater depth.
Who represents demand?
Demand represents the buyers (those purchasing shares).
When there are many buyers, or buyers are aggressive and willing to buy at higher prices, the stock price will rise.
Here is a simple formula:
Demand rises = more buyers = stock price will rise.
Who represents supply?
Supply represents the sellers (those selling shares).
If there are many sellers, do you think the stock price can rise?
It certainly cannot.
When there are many sellers, the stock price will inevitably fall.
Here is a simple formula:
Supply rises = more sellers = stock price will fall
Supply and demand can also be analysed through volume and candlestick patterns.
How so?
You can refer to your own stock charts.
1. Green Candlestick
2. Red Candlestick
3. Volume
Volume also indicates how many lots of shares were transacted in buying and selling.
This is why it also reflects supply and demand.
If the candlestick is green but volume is low, it suggests that demand is not particularly strong either.
Similarly, if the candlestick is red but volume is small, it indicates that selling pressure has weakened.
You can study this on your own stock charts.
Examine the market action (volume and price) to determine supply and demand.
Make sure you conduct proper research before buying or selling any stock.
I shall conclude this article with a learning video about supply and demand in stocks.
Want to learn about stocks? Want to know more?
But not sure where to start?
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And click here to open a CDS account with Mahersaham.
Hope this is beneficial!
Supply and demand in the stock market refers to the balance between buyers (demand) and sellers (supply). When demand is high and supply is low, stock prices rise. When supply is high and demand is low, stock prices fall. This is one of the fundamental principles of the Wyckoff Method.
A green candlestick (where the closing price is higher than the opening price) indicates strong demand, meaning buyers outnumber sellers. A red candlestick (where the closing price is lower than the opening price) indicates strong supply, meaning sellers outnumber buyers. Volume helps confirm the strength of these signals.
The 3 Fundamental Laws of Wyckoff are: (1) Law of Supply and Demand — price moves based on the balance between buyers and sellers, (2) Law of Cause and Effect — the magnitude of a price move is proportional to the accumulation or distribution that preceded it, and (3) Law of Effort and Result — volume should confirm price movement.
Volume shows the number of shares transacted and reflects the strength of supply and demand. A green candlestick with low volume suggests weak demand despite the price increase. A red candlestick with low volume indicates that selling pressure has weakened. Combining volume analysis with candlestick patterns provides a more accurate picture of market sentiment.
Beginners can start by studying candlestick charts and volume patterns on their preferred stock charting platform. Understanding the Wyckoff Method and practising with historical data helps build analytical skills. Download the free Mahersaham ebook to learn the fundamentals of stock investing, or open a CDS account to begin trading.