Supply and Demand, Applied to a Single Stock

Here is the top of a hypothetical order book for a stock last traded at 20.01.

Bids (buyers)	Size	Asks (sellers)	Size
20.00	500	20.02	400
19.99	800	20.03	600
19.98	1,200	20.05	1,500

Everything that follows is in that table. The bids are demand, the asks are supply, and the price moves when one side is used up faster than the other refills it.

Price as a meeting point

In a textbook, a demand curve slopes down and a supply curve slopes up. In a stock, the curves are the resting orders on each side of the book, and you can see a slice of them on a level 2 quote.

A trade happens only when someone crosses the spread. A buyer willing to pay the ask takes shares from the sellers; a seller willing to hit the bid gives shares to the buyers.

Now send a market order to buy 1,500 shares into the book above.

One order moved the last price up by four cents. Nothing about the company changed. Buyers simply wanted more shares at that moment than sellers were offering near the old price.

Thin books move more for the same order. That is supply and demand at the smallest scale.

The book also changes while you watch it. Orders are added and canceled constantly, some liquidity is never displayed at all, and the shares that seemed to be waiting at a price can vanish a moment before your order arrives, so the visible book is a sample of supply and demand and never a promise of a fill.

Events that add supply

Over longer periods the balance is shifted by events that change how many shares are looking for a buyer.

Share offerings. The company sells new shares, adding to what exists.
Insider sales. Executives and early holders sell part of their stakes.
Lockup expiries. After an IPO, many existing holders are barred by agreement from selling for a set period; when it ends, a large block becomes free to trade at once, whether or not those holders actually choose to sell.
Convertible conversions. Bonds or preferred shares turn into common stock.

Each can put more shares on the ask side. Some are scheduled and disclosed well ahead, which is why the date of a lockup expiry or the terms of a convertible are worth checking in the filings before you buy a recently listed stock.

Events that add demand

Buybacks. The company buys its own shares in the market.
Index inclusion. Funds that track an index must buy shares of a company when it joins, and sell when it leaves.
Fund flows. Money entering a fund or a sector gets spent on the stocks it holds.

An index change is the clearest case of demand that has nothing to do with a view on the business. The funds buy because the rules of the index say so.

Buybacks are subtler. They take shares out of the market over time, and the effect depends on how large the program is relative to the shares that actually trade. An authorization is a ceiling. Periodic filings show how many shares were actually bought back.

Float is the part that trades

Supply events matter relative to the shares available for trading, which is the float. A stock with a small float can move sharply on a modest amount of buying or selling, since a given order is a larger share of what is available, and an event that adds a block of free shares to a small float changes the balance more than the same block would in a heavily traded name.

Check the float before you judge the size of any supply or demand event.

What this does and does not tell you

Supply and demand describe how a price moves. They make no claim about what the company is worth. A stock can rise on index buying and fall on a lockup expiry with no change in its prospects, and the reasons a price and a value can drift apart are argued in share price is not value.

We also make no claim about which of these effects is usually bigger. That depends on the stock, the size of the event, and what the market already expected.

Takeovers are the extreme case, where one buyer bids for every share at once. How that plays out is covered in how merger reviews move share prices.