Any
market is made of buyers and sellers/suppliers and there is
always a conflict going on between these two groups. Buyers
want to pay the minimum possible price while sellers on the
other hand want to get maximum possible price. If the price
is too low, buyers would demand a large quantity but sellers
would not want to sell much at this low price. If price is too
high, sellers would love to sell a large quantity but buyers
would not want to buy much. This is a kind of war between two
groups - one trying to push prices lower and the other one trying
to push prices higher. In market economy, price keeps changing
until it reaches a point where the quantity demanded by buyers
equals quantity supplied by sellers.
Stock
market is the mother of all markets. One will see these Demand
and Supply curves change more rapidly for a stock than for any
other item. That is why we see stock prices changing almost
every moment. For a stock, individuals and institutions that
hold the stock or intend to short the stock are the potential
sellers and they collectively define the supply curve. There
are thousands, if not millions, of reasons that may motivate
or prompt a market participant to sell a particular stock he
or she is holding or intending to short sell. Similarly, individuals
and institutions that are thinking/planning to buy the stock
form the Demand curve. There would also be several reasons why
they want to buy this stock. As we all know, a stock’s price
is likely to go up if the Demand is increasing or the Supply
is decreasing. Similarly it is no rocket science to figure out
that a stock’s price would drop if the Demand is shrinking and/or
the Supply is expanding. So when a trader is buying a stock, he wants
its prices to go up after he has bought it. He wants the Demand
for the stock to go up or the supply to dry up.
The
demand and supply curves for any stock are constantly changing.
Variety of economy, industry related or company related events,
news, discussions, analyst reports and political and global
developments constantly change the demand and supply curves
for any stock. Add to this, the fact that given a certain piece
of information, a person can’t be sure how people will react
to it. Aren’t you surprised to see that even after some unexpected
strong positive news about a stock, the stock keeps being traded!
Ideally, if the news is too good, everybody should be a buyer
and there should be no seller! If there were no seller, there
would be no trade! But the fact that most of the stocks keep
trading every moment when the Market is open indicates just
one thing: There are people with totally different views about
the prospects of a stock at any given moment. Everyone who is
driven to buy or sell a stock has his own criteria to value
the stock, his own set of expectations, and his own unique financial
situations and circumstances. This makes it almost impossible
to draw complete demand and supply curve for any stock at any
point in time. And if we do not have any idea about how aggregate
demand and/or supply are changing, how can we predict future
stock prices with confidence?
Exactly
this is where stock prices come handy. The net impact of everything
happening in a stock or a company gets immediately reflected
in the price of the stock. Price is the point where millions
of different counter acting forces balance out. So with enough
attention to changes in the price of a stock over a day or two,
there will be times when we can visualize changes that are taking
place in aggregate demand/supply of that stock, and based on
that, we will be able to determine in which direction the price
of the stock is likely to move over the next few days. There
is no need to get into complex world of demand and supply curves;
all we need is to keep an eye on where the balance between them
is heading. Once we know this, we can take calculated risk in
order to earn some reward.