How do supply and demand influence stock prices?

The influence of supply and demand on stock prices is a fundamental concept in financial markets. When there is an increase in demand for a stock, typically more investors want to buy it than sell it. This heightened interest can lead to an increase in the stock price as buyers are willing to pay more to acquire shares. Conversely, if more investors want to sell a stock than buy it, the supply exceeds demand, leading to a decrease in the stock price as sellers compete to attract buyers by lowering their prices.

This dynamic creates a responsive relationship between trading volume and stock prices, where the equilibrium price reflects the balance between how many investors want to buy versus how many want to sell. As a result, fluctuations in supply and demand inherently lead to changes in stock prices, capturing the essence of market behavior.

In contrast, the other options fail to capture this vital interaction. For instance, asserting that stock prices remain constant regardless of market conditions does not reflect the realities of a dynamic market influenced by various factors. Similarly, the notion that supply and demand can cause prices to remain stable overlooks the very principle that instability and fluctuations stem from shifts in this balance. Lastly, while supply and demand can indirectly affect a company's profitability through market perceptions, they do not determine profitability directly;