Sometimes, it’s easy to get carried away with chasing the next hot stock…
That we forget the role of supply and demand in the success of our investments.
What follows might seem simplistic if you’re beyond the beginner phase. However, reminding yourself how both influence stock prices can help you thrive in this market.
Here are supply and demand basics shaping the economic landscape.
- The Law of Supply:
This fundamental economic principle asserts that all else being equal, the quantity supplied of a good or service increases as its price rises and decreases as its price falls. Producers are motivated to supply more when they can fetch higher prices.
- Factors Affecting Supply:
Various factors influence supply, including production costs, technology, government regulations, the number of suppliers in the market, and the price of raw materials. For example, if raw material prices increase, supply can decrease.
- The Law of Demand:
This fundamental economic principle states that all else being equal, the quantity demanded for a good or service decreases as its price rises and increases as its price falls. Consumers typically seek more of a product when it is cheaper.
- Factors Affecting Demand:
Consumer preferences, income, the prices of related goods, and trends can affect demand. (Ie: If a product becomes more fashionable, its demand may increase).
- Equilibrium: Where Supply Meets Demand:
The market is in equilibrium when supply matches demand at a particular price. The equilibrium price ensures there are no surpluses or shortages in the market.
For example, demand increases prices and incentivizes producers to supply more.
In the broader economy, the law of supply and demand explains the relationship between a product’s availability and price. In the financial markets, it determines stock prices.
For example, if demand for shares outpaces the supply, the stock price rises.
And if the supply of shares exceeds the demand, the stock price usually plummets.
This means keeping supply and demand principles in mind can help you make informed investments that consistently grow your wealth — without taking unnecessary risks.
The oil sector is an excellent example of supply and demand affecting asset prices.
Notice how prices always rally whenever OPEC announces a supply cut?
Or when geopolitical turmoil decreases output from major producers and vice versa?
If you follow my work, you know this is my favorite sector to trade.
But what most people don’t realize is that the supply and demand curve has created new profit opportunities as geopolitical concerns push Brent Crude back to $82 per barrel.
See how to monetize these opportunities as more institutional capital floods the market.