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.
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.
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...
Photo Credit: GoogleImages
Ninteen year-old trader, future connoisseur of options.
Follow me on Twitter!