The Laws of Demand and Supply in The Stock Market

The stock market is also driven by market forces of demand and supply. It is this law that gives the market player, the joint ability to cause price movements in the market and ultimately affect the outcome of the market.

Let’s say you sold apples in a public marketplace. You have a limited amount of say 100 apples and you’re selling at say N50 a piece.

If you hold on to those apples for weeks with no buyer in sight, chances are that because of your need for money or fear that those apples would spoil, when somebody offers you N30 for them, you would naturally want to sell them in order to at least cut your losses.

In the same vein, if you sold apples on the same street where there are many other apple sellers, you would also most likely reduce your price so as to make your apples more alluring and a better offer for potential buyers.

On the flip side, if the demand for it becomes so much, given the same limited number of apples, you would naturally increase the price. However, your reason for increasing the price is not because you just want to; it is that people are in need of apples, so much so that they are willing to pay more to acquire it over others.

This is pretty much how the stock market works and the concept at play here is the law of demand and supply.

The law of demand and supply is something that all of us probably already know – not unless you skipped economics in secondary school.

The foundation that drives home this law is that there are three variables: There is a market, there is a buyer, and there is a seller. The usual law of demand we know as far as economics is concerned is that the lower the price, the higher the quantity demanded and the higher the price, the lower the quantity demanded.

The stock market is also driven by market forces of demand and supply. It is this law that gives the market player, the joint ability to cause price movements in the market and ultimately affect the outcome of the market.

For every transaction carried out in the stock market, there is also always a buyer and a seller. And based on the law of demand and supply, if less people are willing to buy a particular stock, the lower the price gets and if more people are willing to buy it, the higher the price becomes.

Bid Price and Ask Price

In any market, trade only occurs when a buyer and a seller agree to a specific price. In the stock market, this means that a transaction occurs either when a buyer accepts the ask price or a seller accepts the bid price.

A bid price is the price a buyer is willing to pay for a security while the ask price is the lowest price a prospective seller is willing to accept.

The difference between the bid price for a stock and its ask or offer price is what is known as the bid-ask or the bid-offer spread and it shows the difference between the highest price that a buyer is willing to pay or bid for a security and the lowest price at which a seller is offering the security.

If there are more buyers than sellers, then buyers would increase their bids to obtain the security and consequently, they would drive the price up. On the flip side, if there are more sellers than buyers, then they would be forced to reduce their prices to get buyers and force the price down (refer to the apples analogy.)

This is how the law of demand and supply controls the stock market.

Written by Lawretta Egba.