Supply and Demand Basics in the Stock Market
This section explains the core principle: higher demand than supply increases stock prices, and vice versa. It differentiates stock market dynamics from other economic areas, highlighting that stocks represent company ownership, not just commodities. It illustrates this with the example of lumber price surges during the pandemic due to supply chain issues and increased demand.
III. The Influence of Institutional Investors
This section focuses on the significant impact of institutional investors (e.g., hedge funds, mutual funds) on stock prices. Their large-scale buying power can constrict supply, making it crucial for individual investors to understand and potentially leverage these movements. It references William O’Neil’s “How to Make Money in Stocks” and his emphasis on the dominance of supply and demand over any Wall Street analysis.
IV. The Impact of Float on Price Volatility
This section introduces the concept of “float” – the number of shares available for trading. It explains how stocks with smaller floats are prone to greater price fluctuations due to limited supply, offering both higher risks and potentially larger returns. Conversely, large-cap stocks with large floats are more stable but might yield slower growth.
V. Finding the Sweet Spot: Balancing Growth and Stability
This section guides investors towards finding the ideal investment – companies with robust earnings growth and a manageable number of outstanding shares. This balance allows for capitalizing on price movements without excessive volatility. It emphasizes the importance of companies expanding their offerings and attracting institutional investors.
VI. Utilizing Stock Charts to Analyze Supply and Demand
This section introduces stock charts as valuable tools for evaluating supply and demand. It explains how spikes in trading volume, especially when exceeding the average daily volume, can indicate institutional buying and potential price increases. It stresses the importance of analyzing price movements in conjunction with volume for a complete picture.
VII. The Significance of Accumulation/Distribution in Stock Analysis
This section highlights the Accumulation/Distribution Rating as a tool to gauge institutional buying and selling over a period. High accumulation ratings, especially when coupled with other positive indicators like EPS growth, can signal potential stock growth. It also advises paying attention to the number of mutual funds holding a company’s shares, as an increase can precede significant price movements.
VIII. Case Study: The Tech Boom During the Pandemic
This section provides a real-world example of supply and demand dynamics in action. It analyzes the surge in tech stocks like Zoom and Microsoft during the pandemic, driven by increased demand and institutional investment. It also highlights the risks of entering the market late when demand wanes and supply surpasses it, leading to potential losses.
IX. Key Takeaways for Investors
This section summarizes essential takeaways: understanding float and its impact on volatility, recognizing the influence of institutional investors, utilizing volume as a signal, and analyzing Accumulation/Distribution ratings. It emphasizes that mastering supply and demand empowers investors to identify and capitalize on potentially profitable stock movements.