Supply and Demand – Their Significant Power and Impact on Stock Prices
Investment magazines offer various explanations behind the fluctuations in stock prices. It is common to hear about influences on these stock prices such as the credit markets, the economy or earnings. Although all of these factors have their own specific effects on stock sellers and buyers, the truth is that their direct impact on stock prices is quite minimal. These factors only shift the balance of demand and supply.
Stock prices are the direct result of demand and supply. The rest of the influences such as balance sheets, debt, earnings and others affect the desirability of selling or owning a stock. When a company has low earnings, there might be a withering demand for its stocks. Once this happens, it also changes the equilibrium between the sellers and buyers of the stock.
Future buyers will need a discount in the price of the stock and most sellers will be encouraged to accommodate. When there are more sellers than buyers, it means that supply will surpass demand, causing the price to fall.
There will come a point where the price of a stock will drop enough to make it attractive to the eyes of buyers. There are a lot of factors that could change this particular dynamic. When buyers enter the market for a certain stock, the demand will grow faster than the supply, causing the price to increase.
Most of the time, demand and supply find equilibrium at the price that sellers accommodate and buyers accept. When there is a balance between demand and supply that they are almost equal, the prices can move up and down in a narrow range of prices. There are a lot of samples of stocks that stay in flat range for months or days before a certain event disturb the balance between supply and demand.
When a demand for the stock goes beyond the supply, there will be an increase in its price. But, this will rise only to the point where the price will be attractive for the buyers. After that point, it is common for demand to wane.
As you already know, the decline in demand will encourage the stock owners to decide to sell. When owners choose to sell for whatever reason, there will be a decrease in price since the supply is now higher than the demand. Through this drop in the price, the stock sellers hope to entice someone to purchase it.
The same dynamic works when there is a reverse increase in the demand. When the price falls, this will reach a point where the demand will rise and the buyers will find the stock attractive. Once investors start to buy, the price of the stock will increase as more sellers must be encouraged to sell off their shares.
The mechanics of demand and supply is the most critical truth that every new investor must learn as far as stock prices are concerned. It is the give and take that happens between demand and supply that sets the stock prices.