Many people invest in the stock market every day, but only a few of them give much thought about the prominent factors affecting share prices in India. Yes, it is quite important to pick the right companies for investment, but as an idiom goes, ‘Timing is Everything’, it makes more sense to be informed about the reasons impacting the stock prices. There are many factors influencing the prices. Sometimes, company’s earnings, state of the economy or interest rates are the main reasons and sometimes they don’t. Supply and demand are one of the prominent variables leading to the fluctuations in the share prices.
Let us understand in detail the concept of supply and demand in the stock market and how they make the share prices move up and down in value.
Supply and Demand in the Stock Market
There are basically two kinds of people or stockholders in the stock market in India:
- Supply: It essentially refers to the total number of people who would be ready to sell the shares they hold at any price. For instance, let’s say that there are 20 shareholders, each of which is keen to sell the share at a certain price.
- Demand: It primarily refers to the total number of potential buyers who would be keen to buy the shares at any price. For instance, let say there are 20 shareholders, who are only ready to purchase 1 share each by paying a certain price.
How Supply and Demand Fluctuate or Change Stock Prices?
There is a simple logic behind this. If the total number of people who are interested to purchase the shares (demand) is higher than the number of people who are interested to sell the shares (supply), then this leads to increase in the share prices.
On the other hand, if the total number of people who are interested to sell the shares (supply) is higher than the number of people who want to purchase the shares (demand), then it leads to decrease in the share prices.
What Causes the Demand and Supply of the Shares?
Although, it is quite easy to say that demand and supply lead to the change in the prices, but have you have ever what influences the supply and demand of the shares? If not, then let’s figure it out:
- Company News: If there is good or positive news about the company like an increase in profits, getting new tender or expanding in other fields, then the demand for the share prices increase. If there is any negative news like higher debt-equity ratio, product failure, poor financial results, etc, the demand for the shares decreases and the investors try to sell the shares.
- Earnings of the Company: Earnings determine the profitability of the company. Every individual like to invest in the shares of the companies with higher profits. The share prices help the visitors to analyze the earnings of the company and then take an investing decision.
- Greed and Fear: It is important to note that the ‘Greed and Fear’ of the people are one of the prominent driving force affecting the demand and supply of the shares. The demand of the stocks increases when the people are greedy. When people have some doubts in their mind or are fearful, then the supply of the shares increase.
The dynamics between the supply and demand is one of the prominent factors affecting the stock prices and the investors must be aware of the same before they jump in. If you are a first-time investor, then it makes more sense to consult a Securities and Exchange Board of India (SEBI) registered advisor for seeking a sound investment advice and optimizing your money.