How Stock Prices Are Decided: Supply, Demand, and the Chai-Stall Analogy

You walk into a vegetable market. Tomatoes are ₹40/kg today. Last week they were ₹20. Next week they might be ₹60. Nobody “decides” the price — it changes based on how many people want tomatoes and how many tomatoes are available. Stock prices work exactly the same way.

The Chai Stall Example

Remember our chai stall with 100 shares? Let's say one share is worth ₹1,000. Now imagine:

• A food blogger reviews your chai and it goes viral
• Suddenly 20 people want to buy shares, but only 3 people are willing to sell
• The 3 sellers think: “Everyone wants this — I should charge more”
• Share price rises to ₹1,500, then ₹2,000

Next month, the health department finds a cockroach in your kitchen:

• 15 shareholders panic and want to sell immediately
• Only 2 people are willing to buy
• Sellers compete by offering lower prices just to find a buyer
• Share price drops to ₹800, then ₹500

This is price discovery. No single person sets the price. It emerges from the collective actions of thousands of buyers and sellers.

How It Works on BSE/NSE

The stock exchange is a digital marketplace. Here's what happens when you place an order:

1. You place a “Buy 10 shares of TCS at ₹4,000” order
2. The exchange's computer looks for someone selling TCS at ₹4,000
3. If a seller exists at that price — trade is matched instantly
4. If no seller at ₹4,000, your order waits in the “order book” until someone agrees

This happens millions of times per second. The “current price” you see is simply the price of the most recent trade.

What Makes Prices Go Up?

• Good earnings: Company reports higher profit → more people want to own it → price rises
• Growth expectations: “This company will dominate AI” → future buyers rush in
• Sector momentum: Government announces EV policy → all EV stocks rise
• FII buying: Foreign investors pouring money into Indian stocks
• Low interest rates: Fixed deposits give less return → money flows to stocks

What Makes Prices Go Down?

• Poor earnings: Company misses profit targets → shareholders lose confidence
• Bad news: Regulatory action, fraud, management scandal
• Global events: War, recession fears, oil price spikes
• FII selling: Foreign investors pulling money out of India
• High interest rates: RBI raises rates → FDs become attractive → money leaves stocks

Real Example: Reliance Industries

In March 2020, Reliance traded at ~₹1,100. COVID panic made everyone sell — price dropped. By late 2020, Jio's massive growth and Facebook/Google investments made everyone want to buy — price shot to ₹2,100. The business was the same company, but expectations and sentiment drove the price.

Types of Orders

For beginners: use Limit Orders to avoid buying at unexpectedly high prices.