Buying and Selling in Trading
When you engage in trading, you either buy or sell financial instruments. The interplay between buyers and sellers drives market prices, making it essential to understand these dynamics for trading success. This lesson covers the basics of buying and selling in trading.
What Does Buy and Sell Mean in Trading?
In trading, “buy” and “sell” refer to taking positions based on the market price. Buying an asset implies a belief that its value will increase. Conversely, selling an asset indicates an expectation that its value will decrease.
“Buy” and “sell” also denote the market prices shown for any financial market. These prices indicate the levels at which buyers are ready to purchase and sellers are willing to sell. On most electronic trading platforms, you’ll see these prices labeled as ‘bid’ and ‘ask’ prices. Traditionally, you’d buy at the ask price, wait for the market to rise, and then sell at the bid price to make a profit. Modern trading platforms also allow you to sell to open a trade, speculating on price declines.
What is a Long Position in Trading?
A long position involves buying a market, betting that its value will increase over time. This conventional strategy is based on the expectation of selling the asset at a higher price for a profit later. Your returns from a long position depend on how much the market price rises. However, if the price falls, you incur a loss.
Being long can mean outright ownership of an asset or taking a speculative position using derivatives like CFDs or spread bets. With derivatives, you don’t own the underlying asset but have a bullish outlook on its price.
What is a Short Position in Trading?
A short position involves selling an asset with the expectation that its price will decline, allowing you to buy it back at a lower price. The profit comes from the difference between the higher selling price and the lower buying price.
This strategy is the opposite of going long. Instead of choosing ‘buy,’ you select ‘sell’ to open a trade. Profits are realized if the market falls, while losses occur if the market rises.
How Do Buyers and Sellers Impact Market Prices?
Market prices are influenced by the balance of supply and demand. When buyers outnumber sellers, prices rise due to higher demand. As prices climb, some buyers become sellers to realize profits. When sellers outnumber buyers, prices fall as supply exceeds demand.
Factors affecting this balance vary by market. For instance, gold prices respond to economic conditions, mining strikes, and jewelry trends, whereas the share price of a beverage company is influenced by consumer cycles, earnings reports, and industry trends.
Bid and Ask Prices Bid and ask prices form the two-way quotation showing the current levels at which an asset can be bought or sold. The bid price is the highest price buyers will pay, and the ask price is the lowest price sellers will accept.
What is the Bid-Ask Spread? The bid-ask spread is the difference between the bid and ask prices. It is influenced by factors like supply and demand and trading activity. A tighter spread indicates high liquidity, meaning many buyers and sellers are active, facilitating trades at preferred prices. Conversely, a wider spread suggests low liquidity.
Traders are typically charged via the spread, executing trades slightly above the market price for buys and slightly below for sells. For example, if the FTSE 100’s market price is 7205 points with a 1-point spread, you’d open a buy position at 7205.5 and a sell position at 7204.5.