The principles of demand and supply are at the heart of economics, influencing everything from the prices we pay for groceries to the wild swings of global stock markets. Nowhere is this interplay more visible—or more immediate—than in the world of stocks, where changes happen in real-time. Understanding how demand and supply work can give anyone—from investors to policymakers—a clearer view of why prices move and what those changes mean.

Demand and Supply in Stock Markets

Stock markets act as live experiments in demand and supply. Here, investor decisions to buy or sell shares set prices minute by minute, guided by news, expectations, and economic events. When more people want to buy a stock than sell it, the price goes up. For instance, strong earnings reports or exciting new products can make a company’s shares more attractive. If bad news causes many to sell and only a few wants to buy, prices drop sharply.
It's All about Demand and Supply

Macro and Micro

The core drivers of stock demand and supply are factors such as company fundamentals—including earnings, management quality, and valuations—as well as attributes like recent price momentum, company size, and the stock's volatility and liquidity. These characteristics help investors assess which stocks to buy or sell, shaping market activity. On a broader scale, macroeconomic forces like interest rates, inflation, and overall economic growth, along with significant world events such as geopolitical conflicts or pandemics, can influence the entire market. Additionally, investor sentiment, speculation, and evolving preferences for themes like dividends or ESG issues also play an important role in shifting supply and demand across stocks and sectors.

Factor Mining and Weighting

Mining is crucial in factor investing because it allows investors to systematically identify which characteristics—such as value, size, or momentum—are driving stock returns. Without careful mining, portfolios may be built on factors that are ineffective or were merely successful by chance in the past. Proper factor mining ensures an evidence-based foundation for investment decisions and helps uncover new sources of potential return. Weighting determines how much influence each factor has on a portfolio’s performance. Even if the best factors are identified, allocating too much or too little to any single one can increase risk or reduce potential returns. The right weighting balances exposures, aligns with an investor’s risk tolerance, and maximizes the strengths of each factor, making investment outcomes more consistent and robust.

While mining is fraught with statistical pitfalls and implementation challenges, weighting is essential to harness factor benefits but can be undermined by estimation errors and changing market dynamics. However, the effectiveness of your factors mining and weighting depends on if they are aware and understood, as same as you by major investors.

The True Nature of Price: Transactions and Motivations

Stock prices don’t just move because people change their minds—they move when real trades happen. Each transaction is a moment of agreement between a buyer and a seller, but "value" can mean different things to different people. Investors use their unique strategies and perspectives. One person's "bargain" might be your "too risky." Not every trade is about finding value. Institutions might buy or sell for reasons like balancing portfolios, hedging, or following client mandates. This can push prices higher or lower even if nothing about the company itself has changed. Prices don't always reflect some true, universal value—they're the product of many negotiations, motivated by countless personal, institutional, and strategic factors.

Examples

  • Hot IPOs - When popular companies like Airbnb or Alibaba go public, there's often a scramble to buy shares. Limited supply plus intense demand can send stock prices soaring above their launch price.
  • Short Squeezes - Events like GameStop in 2021 saw retail investors buy up shares, forcing hedge funds to buy back stock they had shorted, causing a rapid price spike.
  • Stock Buybacks - When a company repurchases its own shares, the amount of stock in circulation shrinks, supporting or increasing prices even if demand stays the same.
  • Panic Selling - During crises （such as the COVID-19 crash in March 2020）, a flood of sellers and a lack of buyers sent prices into a rapid freefall.

An Analogy: Farming on Mars

Picture early farming on Mars. The first crops are precious and costly as only a few farms can produce food, so supply is scarce but demand is enormous—making prices sky-high. As technology advances and more farms are built, supply rises. Even if Martian demand stays strong, those abundant crops mean prices drop, making food more accessible.

Demand and supply are the backbone of both stock markets and the broader economy. Countless factors—from investor sentiment to world events—shift these forces and, with them, the prices we see each day. The stock market is not just a reflection of company value, but of a complex web of motivations and decisions. The more we understand these dynamics, the better equipped we are to make smart choices, whether investing, spending, or setting policy.