Supply and Demand Drive Stock Prices

What can stock investors learn from the credit crisis and the declining values in the housing market?
Aside from the damage caused to stock prices thanks to billions in write downs by major financial services companies, the falling values in the housing market is a good reminder of how supply and demand work.
When you read that home prices are tumbling (after years of rising) in major metropolitan markets, you have to ask why.
Has something changed that makes those houses worth less than a year before?
Markets Change The houses haven’t changed, but the market has. In many major cities, the supply of real estate has been behind the demand.
This created and sustained a sellers’ market, which means if there are more buyers than desirable properties prices will rise.
Those properties are no less desirable than they were a year ago, however the credit crisis has reduced the number of potential buyers.
Tougher lending standards may prevent some from qualifying, while others are just nervous about buying property that may continue to decline in value.
Sellers and Buyers The result is there are now more sellers than buyers, which reverses the relationship. With fewer potential buyers in the market, prices will drop as homeowners compete for the sale.
A note about the buyer-seller relationship: In free markets, you must have a willing buyer and a willing seller. When I say there are more sellers than buyers, I mean that sellers are forced to provide incentives to convert reluctant prospects into buyers.
They do this primarily by lowering the price. A prospect is then converted to a buyer.
This seems simple and obvious, but it is how markets work.
In the stock market, the basic principles of supply and demand are the same.
Attractive Stocks When a stock is attractive for whatever reason (great fundamentals, lock on its market, new patent, and so on), there tend to be more buyers than sellers.
Sellers may be coaxed into parting with their stock by a higher price.
For a stock that is out of favor, prospects must be wooed with lower prices to convert them into buyers.
Supply and demand make sense, but what doesn’t always make sense is what causes investors to favor one stock over another.
However, it ultimately comes down to matching willing sellers and willing buyers at a price both agree on for the sale.