Supply and demand works in the stock market, just as it does in the broader economy. The concept is simple: when you have more demand and less supply, stock prices rise. But when demand drops compared to supply, stock prices decline. Investors can capitalize on this relationship to buy low, sell high – and build long-term wealth.

Understanding supply and demand in the stock market

The law of supply and demand explains how an item or investment’s price results from the interplay between its availability and market appetite.

Generally, as demand for an investment soars against limited supply, sellers can charge higher prices. Conversely, if demand sags or an overabundance of shares abounds, buyers won’t bite until prices drop.

Factors that impact stock supply and demand

Supply and demand is a primary driving force behind stock price volatility, which in turn impacts your bottom line. But the “cycle” of supply and demand doesn’t just happen – several factors play into price fluctuations.

Economic trends

Economic trends, such as unemployment and GDP numbers, feed into stock market performance. When the economy performs well, stock demand rises, spiking prices. But when the economy crumples, demand falls, dragging prices down.

Interest rates

If the economy performs too well, inflation rises, which can spur the Fed to raise interest rates. Since higher rates tend to decrease stock demand while a booming economy increases it, these factors often moderate each other.

Corporate results

A company’s revenues, profits and forecasts greatly influence demand. Since bright prospects historically correlate to higher prices, demand rises when corporate earnings look good. Conversely, poor earnings results often feed into downward price trends.

Company fundamentals

Well-managed companies with solid histories look more enticing than poorly-managed firms that struggle to turn a profit. The more attractive a company, the greater the demand for its stock, and the better price it commands.

But if investors are disappointed with a company’s performance, they may sell out, flooding the market with cheap shares.

Investor perception

Investor perception is a powerful market force. Economic, industry, market or corporate news can all nudge investor perceptions about a particular stock.

As a result, trading patterns may change, generating supply and demand imbalances that feed into price fluctuations.

Stock issuances and buybacks

Corporations can also directly influence their stock supplies. For instance, a company may issue more shares, split its stock, or initiate a share buyback policy. Any of these actions can impact supply, while the news of such actions may shift demand.

How does supply and demand affect investors?

Ultimately, the essential factor that determines a stock’s market price is how much someone will pay per share.

As demand rises and supply shrinks, people are willing to pay more. While that benefits you as a seller, you’ll have to shell out more if you’re looking to buy.

But when demand shrinks and supply rises, you’ll get to buy the same stocks at a discount, lowering your long-term purchase costs.

Fortunately with Q.ai, you don’t have to worry about supply and demand. Instead, you can put your capital to work in our Investment Kits and reap the benefits of letting our AI do the heavy lifting.