How Supply and Demand Affects the Stock Market

Supply and demand is indeed what makes a stock rise and fall. Let’s say stock ABC is valued at 32. Throughout the day, stock ABC might drop to 29, spike up to 34, and fall back down to 31.

What caused ABC to drop? Why did ABC go back up when it did, instead of continuing to drop? And why did ABC stop rising at 34, and instead start to fall back down?

The answer to these questions lies in the expectations of the investors. Each investor, based on his/her own analysis, has a number they believe a stock is worth. The lower a stock falls, the more investors there are that believe the stock is worth more than it’s priced at for the moment. Likewise, as the stock rises, there are more and more investors that believe the stock is priced at more than they believe the stock is worth.

Whether an investor believes a stock is under or over priced is what will drive him/her to buy or sell stock. This is what makes stock prices rise and fall – As the numbers fluctuate, investor expectations change, which is what causes changes in stock prices.

How can you use this information to your advantage? Investor expectations for any given stock tend to be set, unless something drastic happens. For example, let’s say most investors believe the stock ABC is worth somewhere between 31 and 35. This is a reasonable value for this stock. If the stock were to fall below 31, investor expectations for the stock to go up would increase the demand of the stock, which raises the price again.

By noticing this pattern of supply, demand, and investor expectations, you can use this data to predict when a stock will rise and fall, as well as determine what are good entry and exit points.

Momentum Stock Trading System
Systematically find and profit from huge Momentum Stocks