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The law of supply and demand controls the price of almost everything you use.

This principle also applies to the stock market, and you can use this knowledge to your advantage.

Shares outstanding is the supply of the stock.

The more shares outstanding, the harder it is to budge the stock, because it requires more volume of buying.

That’s why, with all other things being equal, the smaller cap stock will usually be a better performer.

The trade-off for this is less liquidity, which presents more risk.

So, as always, the greater the potential reward, the greater the risk.

The total number of shares outstanding represents the potential amount of stock available.

The ‘floating supply’ is the number of shares available after subtracting closely held stock, such as that which top management holds.

Generally, the more stock held within the company, the better, since management has their own money on the line.

Similarly, if you notice a company buying its own stock in the open market, it can be a positive sign, especially when earnings are growing.

A stock split is when a company increases the number of its shares by issuing more shares to existing shareholders, thereby reducing the price per share but keeping the overall market value of the investment the same.

A first split of a stock in a new bull market will usually end up increasing in price after a correction period.

Sometimes, companies will split the stock too much, which is bad. If it is split three-to-one or more it is a bad sign.

A stock will usually top out after the second or third time it splits.

When it comes to personal finance, you should never borrow more than you can afford to pay back.

But it doesn’t stop there.

Excessive debt is bad for everyone, including governments and companies.

Therefore, once you have found a stock with a reasonable amount of shares, you must also check to ensure it has a low debt-to-equity ratio.

A good sign is if the company has been steadily reducing its percentage of debt in recent years.

Also watch for the presence of convertible bonds because the eventual conversion of them into stock will dilute earnings.

Tracking a stock's daily trading volume is the best way to measure a stock's supply and demand.

When there is a pull-back in price, you want to see a drying up of volume. When there is a rally, you want to see an increase in volume.

When breaking out of a price consolidation, trading volume should be at least 40% above normal.

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