Supply and Demand in Relation to Market Analysis

Learning how to conduct a solid market analysis is essential for anyone looking to trade or invest. We live in a market driven economy. This economy has delivered unprecedented wealth and prosperity for the masses and has created an age of astounding economic and technological development. Understanding the basic functions of the market can thus lead to a greater understanding of how the world works.

By learning how to conduct a market analysis, you will learn how to predict and understand trends. This is essential for figuring out which stocks, commodities, or other financial instruments you should purchase. Learning how to predict trends and understand markets can lead to big returns in the long run, but actually conducting a market analysis is no easy task.

The fundamental principals of market analysis

A market refers to a place or process through which sellers and buyers regularly trade goods, and in which supply and demand determines price. The concept of supply and demand is one of the most fundamental and essential concepts of any market driven economy, so you need to pay extra close attention to it.

Basically, the entire concept of the modern economy rests on the notion of supply and demand. Demand refers to how big the quantity of a certain service or product buyers want to buy. Smart phones, for example, are now in high demand as millions, if not billions, of people want to buy them. Old rotary phones, however, are in low demand because few people want them.

Supply refers to the quantity of a product available to be sold by sellers within the market. Generally, suppliers work to supply things that are in high demand. Right now, for example, numerous major companies are building smart phones because demand is high. Only a few companies, on the other hand, are producing old rotary phones due to the low demand.

According to the basic laws of economics, supply and demand exist in a close relationship to one another. As demand increases, supply also tends to increase as people produce more goods and services to meet demand. If supply is larger than demand, then prices tend to be pushed downwards.

An example of how supply and demand works

Theory is theory, and when it comes to investing, examples often work better. So let’s take a moment to consider how supply and demand works, and how it can impact markets. In this case, we will use the example of a stock, but market research can be used to analyze how any type of market works.

Think of it this way, if news suddenly breaks that Acme Pharmaceuticals recently developed drug has been rejected by the FDA, stock prices for Acme Pharmaceuticals will almost certainly decline. Why? Because a lot of investors will be scared off by the FDA’s rejection. Suddenly, the supply of Acme stocks on the market will increase as investors look to offload their holdings. Meanwhile, demand will decrease as fewer investors will want to invest in the company. As a result prices will plummet.

As prices plummet, however, Acme Pharmaceuticals’ stock will start to look more and more attractive. Investors will begin to see an investment in Acme as less and less risky. Perhaps the company can adapt its drug to meet FDA approval, or perhaps the company has other products in the pipeline? Eventually, Acme’s stocks will drop to such a point that demand will once again match or exceed supply. Prices will then stabilize and perhaps even rise.

Understanding supply and demand is essential for anyone looking to conduct a market analysis. And learning to conduct such an analysis, in turn, is essential to anyone looking to make sound investment choices.