Introduction To Stock Trading
Stock trading involves the buying and selling of company stock, with the aim of making a profit.
The profit can be made by selling the stock at a higher price than was paid for it, or by borrowing stock to sell at a high price, then buying stock to repay the loan at a lower price and keeping the difference (short selling).
The Two Basic Stock Trading Strategies
The price doesn't just have to go up!
Most people imagine that to make money trading stocks, the price of the stock has to rise. This isn't so.
Long Trading
Long trading is the traditional "buy low /sell high" strategy. Imagine a trader wants to buy stock in Google. He might buy 100 shares at a price of $300 per share, costing him $30,000. If the price rises to $400 per share, and he sells those shares (for a total of $40,000), he will make a profit of $10,000 - the difference between what he paid and what he sold for.
Short Trading or Short Selling
If our trader believes the price of a stock will go down, and he wants to profit from that, he can do so. He does this by borrowing some stock from his broker, selling it, then buying back the stock to repay the broker when the price has fallen.
For example, the trader wants to sell (go 'short') Google. He does not currently own any Google stock, so he borrows 100 shares from his broker, and sells these at the price of $300 per share. This means his account is credited with $30,000 ($300 per share x 100 shares).
The price of Google stock subsequently drops to $20 per share. Our trader buys back 100 shares at that price, costing him $20,000. Those shares repay the broker to 'cover' those he borrowed. With the transaction complete, the trader is left with $10,000 in his account (the difference between the money he was credited when he sold the borrrowed shares, and what he paid to buy back those shares). This is his profit.
So you can see it's perfectly possible to make money from stock trading whether prices are rising or falling.
There are certain caveats to this - difference exchange rules govern under what circumstances a trader can go short, and not all brokers will allow the practice either.
Long Trading
Long trading is the traditional "buy low /sell high" strategy. Imagine a trader wants to buy stock in Google. He might buy 100 shares at a price of $300 per share, costing him $30,000. If the price rises to $400 per share, and he sells those shares (for a total of $40,000), he will make a profit of $10,000 - the difference between what he paid and what he sold for.
Short Trading or Short Selling
If our trader believes the price of a stock will go down, and he wants to profit from that, he can do so. He does this by borrowing some stock from his broker, selling it, then buying back the stock to repay the broker when the price has fallen.
For example, the trader wants to sell (go 'short') Google. He does not currently own any Google stock, so he borrows 100 shares from his broker, and sells these at the price of $300 per share. This means his account is credited with $30,000 ($300 per share x 100 shares).
The price of Google stock subsequently drops to $20 per share. Our trader buys back 100 shares at that price, costing him $20,000. Those shares repay the broker to 'cover' those he borrowed. With the transaction complete, the trader is left with $10,000 in his account (the difference between the money he was credited when he sold the borrrowed shares, and what he paid to buy back those shares). This is his profit.
So you can see it's perfectly possible to make money from stock trading whether prices are rising or falling.
There are certain caveats to this - difference exchange rules govern under what circumstances a trader can go short, and not all brokers will allow the practice either.
More On Stock Trading
- Online Stock Trading
- Specifics about trading stocks online
- Day Trading Course
- What to look out for if you want a day trading course
