Supply and demand balancing function

Supply and demand balancing functionLet's look at what the function of balancing supply and demand is. If you have ever had to watch the evening business news on TV, then you probably heard statements from journalists that some stocks rose in price due to the fact that the number of people willing to buy these stocks exceeded the number of their sellers. At first glance, there is nothing more trivial than such statements. Even novice investors are aware that in order to perform any trading operation, it is necessary to have a seller and a buyer.

 

In fact, the journalist meant that there was an imbalance of supply and demand. In other words, the stock price is a function of supply and demand. In macroeconomics, this concept can be illustrated with the help of any product that is freely available. When farmers grow more grain than bakeries require, its price drops. When bakeries need more grain than farmers grow,bakeries are ready to pay a higher price for the grain they need.

 

In many ways, the stock price behaves just like the price of wheat. When buyers want to buy more shares from a certain package than people who have these shares are willing to sell, buyers “wind up” the price of these shares until sellers are ready to part with their existing shares. Conversely, when sellers cannot find enough buyers for their shares, they offer these shares at increasingly lower prices. This process continues until there is a sufficient number of buyers for these shares.

 

Changes in the company's business plan, the emergence of a new competitor, and practically any other reason can completely unbalance supply and demand. Technical analysis is entirely based on the understanding that it is these imbalances that cause stock price fluctuations.



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