Dependency of Stock Price on Market Equilibrium

The stocks are the assets of market. The economic theory of demand is applicable for resource allocation and asset pricing. Stock price of a company depends on so many intrinsic and extrinsic factors. Extrinsic factors include economy related indicators. Demand of a stock in market depends on both internal and external elements of the company. Market equilibrium depends on demand and supply gap. Market equilibrium can be Pareto optimum under a set of sufficient conditions. Incompleteness of the market happens due to lack of information dissemination which results into market imperfection. Stock Market Efficiency influences the gap between demand and supply of stocks which coupled with other factors determines equilibrium price and transaction quantity. Consumers or traders make their investment decision based on the forecasting of equilibrium price of various stocks to compose their portfolios with an objective of optimum gain over a period. In ideal situation, there is no gap between demand and supply when market equilibrium is reached. This research paper explores the nature of dependency of stock price on market equilibrium which is denoted by the extent of difference between demand and supply. The present research has found that change in stock price has a positive correlation with the gap between demand and supply. The changed price of stock is determined by the new equilibrium of market which is attained at an updated demand and supply level.