Supply and Demand

The law of supply and demand is an important idea in the stock market and in the course of everyday life. The principle of supply and demand states that if too many people want something, the price of that thing (whatever it is) will go up. (We briefly discussed this concept in another section and referred to increasing prices as inflation). The word “supply” usually refers to the availability of the product in question. The word “demand” usually refers to the desire to have that product. If there is too much supply of a product, that product becomes so common that the maker can’t really charge very much for it. 

Think of a diamond, which is a very expensive precious stone. One of the reasons diamonds are expensive is that the amount available for sale around the world is tightly controlled by a handful of dealers who create an artificial shortage. Because so many people want diamonds (for their wedding engagements and for other special occasions), and because the supply is kept low, the price of diamonds stays high from year to year.

The prices of stocks also change according to how many shares are available and how much people want them. If more people want to sell a particular stock than to buy it, the price of that stock will fall because the stock market is truly a market with sellers (or those who supply stocks) and buyers (or those who want or demand stock).