How to trade
Buying and selling
Buying and selling is trading at its most fundamental. It determines your profit, and the price of an asset at any given time.
As we covered in the Introduction to financial markets course, the number of buyers (or 'bulls') versus the number of sellers (or 'bears') in a market at a given time will directly impact its price.
If lots of people are trying to sell an asset, then supply will outstrip demand, and its price will fall. If most traders are trying to buy, on the other hand, demand exceeds supply, and its price will rise.
But buying and selling isn't just how prices are set – it's also an essential part of everyday dealing.
Buying and selling in trading
The fundamental principle behind any trade is to make a profit, which is determined by the difference between your opening and closing price.
Let's say you decide to buy the FTSE 100 when it is at 6000. You’ll close your trade by selling the FTSE 100, so in order to make a profit you will need to sell the index above 6000.
If you close when the FTSE is at 6100, then the market has moved 100 points in your favour. If you close when the index is at 5900, it has moved 100 points against you.
Let's say you have a position worth £1 for every point that the FTSE moves:
- Buying at 6000 and selling at 6100 makes you £100
- Buying at 6000 and selling at 5900 loses you £100
Bid and ask prices
Whenever you view a financial market, you'll see two prices listed. The price on the left is the bid and the price on the right is the ask (sometimes referred to as the offer).
- When you sell, you trade at the bid
- When you buy, you trade at the ask
The bid will always be lower than the current market price, while the offer will always be higher.
What is the spread?
The spread is the difference between the bid and the ask prices, and is an important thing to when calculating your profit or loss from a trade.
Let's return to our example above. When the FTSE is at 6000, it might have a bid of 5999 and an ask of 6001. So, to buy the FTSE, you would open at 6001.
You would need the FTSE's bid price to move above 6001 before you can earn any profit from your trade. If the FTSE moves up to 6002, but its bid is 6000, then you would still make a £1 loss.
Test your knowledge
- A Trade at 1.1641
- B Trade at 1.1643
- A 90
- B 82
- C 86