Supply and Demand in the Stock Market

First of all, let's start with explanation of what stock actually is. Basically, stock is a partial ownership of a company. Companies usually sell stocks to the public when they want to raise money for research and development, exploration, promotion, expansion or whatever else a company might need money for. A stock exchange is a is a marketplace where people and companies can buy and sell stocks. The people handling these transactions are called brokers. The value and the price of a stock is determined by what is the potential profit for the company. Supply and demand are felt in the stock market in a very real bidding war by buyers and sellers negotiating transactions. Therefore, it is really important to understand the factors that affect the supply and demand of a stock.

Supply

If the supply of a stock goes up (shifts to the right), the value of the stock will fall, all other things being equal. If the supply drops, the price goes up. 

Some of the factors that affect supply are: 

• If a new share offering is conducted to raise additional capital, this increases the supply of shares on the market.
• If a company has a stock split, this increases the supply of shares on the market.
• If a company buys back its shares and cancels them (called a normal course issuer bid), the supply of shares decreases.
• If employee stock options are granted, this has the potential to increase the supply of shares when the options are exercised.

Demand

If the stock becomes more attractive to investors (increased demand), the stock goes up in price. If investors lose interest, demand falls and so do prices.

Some of the factors that affect demand of stocks are: 

• If profits reported are greater than expected, demand increases.
• If profits reported are less than expected, demand decreases.
• Sales are also drivers of demand. Important new contracts will send demand up while shortfalls in sales will send demand down.
• The company’s debt load can affect demand. If the company takes on too much debt, demand could fall if the public believes the debt to be unmanageable.
• News about a company can change the demand for its shares. Good news increases demand. Bad news lowers demand.
• Mass psychology can play a huge role in demand. Individual stocks as well as whole markets can move quickly if there is a general belief among investors that the stock or the market will go up or down even if there is no rational basis for such movement.

The relationship between supply and demand can be depicted graphically by stock charts. Stock charts are basically the dynamic snapshots of supply and demand in action. Every change in price causes shifts in supply and demand and therefore also setting a new equilibrium. The great thing about the free market system is that prices and quantities tend to move toward equilibrium and, for the most part, keep the market stable.