How to trade
Buying and selling in trading
When you trade, you’ll either buy or sell a financial instrument. The relationship between buyers and sellers is what drive market prices, so understanding it is crucial to your success. Learn what buying and selling in trading mean in this lesson.
- What does buy and sell mean in trading?
- What is a long position in trading?
- What is a short position in trading?
- How do buyers and sellers impact market prices?
- Bid and ask prices
- What is the bid-ask spread?
What does buy and sell mean in trading?
Buy and sell in trading refer to the two positions you can take on the market price. When you buy an asset, you’re taking the view that it’s going to rise in value. When you sell an asset, you’re expecting it to decline.
Buy and sell can also refer to the two market prices that are displayed for any financial market. These tell you the current level at which buyers are willing to purchase an asset and sellers are willing to part with it.
You’ll see ‘buy’ and ‘sell’ used in most electronic platforms. Buy and sell prices are also commonly known as ‘bid’ and ‘ask’ prices.
Traditionally, you’d buy an asset at the bid price to open your trade. You’d then wait for the market to rise enough to earn a profit, and then sell your asset back to the market at the ask price to close out the position. Modern trading technology, though, means you can also sell to open a trade and speculate on falling prices. We’ll cover this in more detail in the next lesson.
What is a long position in trading?
A long position is another way of describing the act of buying a market. It’s the more conventional position that most investors take, out of a belief that an asset will increase in value over time, and they can sell it back to the market for a profit later.
Your return from a long position will depend on how far the market rises. If the price of the market falls instead, you’ll make a loss.
Being long can either refer to the outright ownership of an asset, or a speculative position using derivatives. When you ‘buy’ via a derivative, such as a CFD, you’ll never own the physical underlying, but you have a bullish attitude toward its price.
What is a short position in trading?
A short position is the act of selling an asset in the hope the price falls and you can buy it back again. Your profit would be the difference between the higher price you borrowed it at and the lower price you bought it back for.
It’s the opposite of going long. Instead, of choosing ‘buy’ in the platform, you’ll simply choose ‘sell’ to open instead. You’d profit if the market declined and make a loss if it increased instead.
How do buyers and sellers impact market prices?
Buyers and sellers impact market prices by altering the supply and demand balance for an asset. When there are more buyers on a market, prices rise as demand outstrips supply.
But as price climbs, those buyers might turn into sellers – after all, they want to see some return on their investment. Eventually, when there are more sellers than buyers, prices will fall as supply floods the market.
The factors that impact this relationship vary from market to market. For example, gold prices will respond to economic conditions, mining strikes and jewellery trends, whereas the share price of a beverage company would be impacted by consumer cycles, earnings reports and industry trends.
Bid and ask prices
Bid and ask prices make up the two-way quotation that shows traders the current levels at which an asset can be bought or sold. The bid price indicates the highest price that buyers are willing to pay, and the ask price represents the lowest price sellers are willing to accept.
What is the bid-ask spread?
The spread is the term used to describe the difference between the bid and ask prices. The spread will be influenced by a range of factors such as supply and demand, as well as trading activity.
The spread is used as a measure of liquidity – a tighter spread indicates that there are plenty of buyers and sellers on the market, but a wider spread indicates little activity. The better the liquidity, the more likely it is that you’ll execute a trade at your preferred price.
When you trade, you’ll also normally be charged via the spread. You’ll execute your trade slightly above the market price and sell slightly below it.
For example, if the current market price of the US SP 500 is 4205 points, and there is a 1-point spread, you’d open a buy position at 4205.5 and a sell position at 4204.5.