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Message: Are there enough shares?

David & Sulasailor,

Shares prices are indeed subject to the laws of economic supply and demand. However the question relates to the "elasticity" of demand and supply.

To demonstrate. In a perfect world an increase in demand of 10% would result in a price increase of 10%. In this case the supply line would be 45 degrees. Most items do not have a 45 degree supply line and err towards perfectly elastic (horizontal supply line) or perfectly inelastic (verticle) as such a % change in demand results in a disproporionate change in price.

Relating this back to the shares, whilst there may be 200m tradeable share for example you would expect in the perfect world a demand increase of 10% to have a 10% effect on price. However as was mentioned, many of these shares are in the hands of longs and therefore not being traded. The elasticity of supply is therefore effected and consequently small changes in demand (trading) can have disproportionate effects on price.

This theory explains why volume is a key indicator when conducting TA.

Hope this helps.

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