Introduction to Stocks

What is a stock?
A unit of stock represents ownership in a company that can be bought or sold in the market. After opening up a brokerage account, you are ready to trade!

What do I do?
To start off, let’s explore buying and selling stocks, or having a long or short (respectively) position.

Going long: Buy-low, sell-high
When you are going long on a stock, you buy the stock at a low price and sell it to someone else in the market at a high price. Imagine you are not a trader, but rather a shop owner, and you are not selling stocks, but you are selling books, for example. You buy your “books” at a low price, so that when you sell them to your customers you can charge or sell your books for a higher price and make a profit. The same logic applies when going long on a stock: buy at a low price and sell at a high price to make a profit!  When you are going long you are under the assumption that the stock’s price will rise in the future.


Shorting stock: Sell-high, buy-low
When you are shorting a stock, you open a sell position at a high price and fufill your obligation of buying back the stock at a low price. It seems illogical, selling before buying, but the market is a mysterious place. When you short a stock, you are acting opposite of how you would approach a long position.  You sell high and buy low, under the assumption that the stock’s price will fall in the future.

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Probabilities:
Whether you’re long or short on your position, you’ve probably intuitively realized that you have a 50% of making an unlimited profit or loss. 

• When going long, if the stock price goes up you have a 50% chance of making a profit. If the stock price goes down you have a 50% chance of incurring a loss.
• When shorting stock, if the stock price does down you have a 50% chance of making a profit. If the stock price goes up you have a 50% chance of incurring a loss. 

Demystifying Selling stock: One would wonder as to how can one sell a stock if one doesn't own it? You'd have to own it to sell it right? If you sell a stock after you owned it, you have basically closed a position that you had open. So back to selling short, how does it work?  The process works as such: Say you don't like a stock XYZ (for whatever reason) which is trading at $100 and you think that'll be moving down in near future and want to profit off this downward movement. You short the stock by opening a short position at $100. Behind the scenes, your stock broker is lending you stock (priced at $100) which you sell in open market (for $100). After the down movement to say $90, you buy back the stock at $90 and return it to your broker while keeping the profit of $10. But if the stock moved up to $110, and you are feeling the heat of this $10 loss, you'll have to pay $110  to buy back the stock and return it to the broker.

The Drawbacks:
Buying and selling stocks seems easy enough, but the odds of making or losing money is akin to flipping a coin. Though profit is limitless, so is potential for loss. And to top it off, buying and selling stocks isn’t cheap unless you've cultivated the rare species known as moneygrowingtree. So until then...
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​Photo Credit: GoogleImages