#3: Stock Market Terminology Every Trader Must Know
I want to share with you a few common stock trading terminologies that you'll probably come across.
So if you understand what these means then hey, you can just move on and you don't have to read this lesson.
But if you have no idea or you're clueless then hey, pay attention.
With that said, let’s get started…
Common trading terminologies
Here are the terminologies we will discuss…
- Bid & Ask
First thing’s first…
When you hear traders say that, “Hey, I'm long on this stock!” or Hey, I'm short on this stock!”
It simply means the direction of the trade that they are taking.
When someone says they’re long it means that he will make a profit when the stock price goes up.
For example, I say I'm long Apple shares $100.
It means that I bought Apple shared at $100, and if Apple shares go up to $120, I make a profit of $20.
On the other hand, when a trader is short, a trader will profit if the stock price goes down.
How does this work?
What actually happens is that he will borrow shares from the broker so that a trader can profit when a stock price goes down.
So let's say, I'm short on Apple at $100 and I have borrowed $100 worth of shares from my broker.
If Apple per share drops down to $90 and exit my trade, what happens is that I “buy back: $100 and collect the difference/profit of $10
This is how short-selling works.
But if the stock price goes up, then it will move against you and you will experience a loss.
Also, stocks usually go up in the long-run and could go up forever from $5 per share to $1000 per share and beyond.
Which means, your losses are technically unlimited if you short a market.
Let’s move on…
Bid and Ask
When you are dealing in stock trading or futures trading, you will see that there's no one price in the market.
There are always two prices.
But basically, there are two key prices that you've to pay attention to, the bid and ask.
Bid = the price you can sell at
Ask = the price you can buy at
Which means, if you want to buy a stock, you have to look at the Ask price.
But if you want to short/sell a stock, you would have to look at the Bid price.
This is what we mean by the Bid and Ask.
Now, what is the spread?
It simply means the difference between the Bid and Ask.
So if Apple has an Asking price of $100.20 and a Bidding price of $100.10
The spread of Apple would be $0.10 and that, to you my friend, is a transaction cost you have to incur.
And this is not even taking into consideration your Commissions and fees to the exchange.
One thing to note is that…
Large-cap stocks are more liquid (tighter bid-ask spread)
Small cap stocks are less liquid (larger bid-ask spread)
Depending on what stock you trade, it will eat up into your stock returns.
So this is something that you must know.
With that said, let’s do a quick summary…
- Long/Short basically means what your trading direction is
- The Bid is the price that you can sell it, the Ask is the price that you can buy it
- The spread is the difference between the Bid and Ask
- Large-cap stocks tend to have a tighter spread
- Small cap stocks/less liquid stocks tend to have a wider spread