Episode 5: Buying and Selling

In this episode we’ll look at Buying and Selling. Let’s imagine you’ve found a stock that meets all your entry conditions. We now need to take steps to open a position – we want buy some shares.

Transcript:

'Successful Trading' - Episode 5: Buying and Selling

Presented by Jeff Bryant, HomeTrader.

Hello – and welcome to Episode 5 in our series on Successful Trading. Up until now, we’ve covered a number of the preliminary steps involved in developing a successful Trading Plan. These previous episodes are available in the archives and I recommend you take a few minutes to have a look at them.

Last time, we covered Entry Conditions. In this Episode we’ll look at Buying and Selling. Let’s imagine you’ve found a stock that meets all your entry conditions. We now need to take steps to open a position – we want buy some shares. How do we do that? We have to place an order. There are a number of different types of orders that can be used. There’s Market, Limit, and Stop.

The Market order is very simple – you want to buy some shares, and you want to buy them now. Placement of this order requires the market be open. When you place a Market Order, you are accepting that you will buy from the lowest seller at that time, whoever they may be, and whatever the price they might be asking.

The next and probably the most common type of order is the Limit Order. This order specifies the price, above which you are not prepared to buy the stock - you limit how much you will pay per share. If you’re selling, it’s the other way round. The limit is the lowest you’ll go – you won’t accept a price below your limit. The limit order can be placed at any time, day or night.

The third type of order is used less commonly – the Stop Order. The Stop requires that the price be at or beyond the specified level. If you are buying, you want the price to be at or above the nominated. More commonly, the stop order is used to exit a trade. When closing a long position, you want to get out if the price moves down to, or below your nominated Stop level.     

OK - let’s imagine you’ve placed a limit order. That order will have been processed almost instantaneously by your broker, and is now visible to all market participants. The means by which they can see this order is via what is called Market Depth, which displays orders that are currently in the market. Market Depth consists of 2 primary parts. On the left are the orders placed by the buyers, or bidders. On the right are the orders placed by the sellers – those with an asking price.

At this point, it’s important to understand that the Stock Market is just like any other market. It’s nothing more than a forum for potential buyers and sellers to meet and negotiate. When they reach agreement, a parcel of shares will change hands, at the agreed price. That is how price comes to be – and this interaction is the only way price can change.

In this example, you can see that the highest bidder is prepared to pay $3.38, as listed on the top of the left-hand side. On the right hand side, the lowest seller is listed at the top – in this case at$3.39 These 2 prices represent what is called the ‘spread’. At the moment, the spread is 1 cent – and not much is happening. For there to be another transaction, either the Buyers will need to pay more, or a Seller will have to accept a lower price.

The relative strength between the buyers and the sellers will be seen by who moves first. This will, in turn, determine whether the price is moving up, if demand is stronger – or down, if the desire to sell is stronger.

We don’t try to predict the outcome of this ongoing struggle, we simply wait for its outcome, then we react. I mentioned earlier that we place our orders through a broker – a stockbroker.  This is our access to the market.  There are 2 main types of broker –. Internet and. Full Service.

The Internet broker is for those who want to place their own orders.  The proliferation of these brokers over the last decade or so has given many people much cheaper access to the market.  

It needs to be noted though that this, for those who haven’t yet learnt how to exist in this very competitive environment, has too often led to disaster. You need to know what you are doing – and that’s where HomeTrader comes in. We provide all the training and support you need.

The full service broker not only oversees your orders but is also licensed to provide market recommendations.  At HomeTrader, we’re part of the StoneBridge Group – and our R & D department is able to provide signals from proven trading plans. This can be an ideal way for people to get started.

We also make available the HomeTrader Global Trading Platform, which presents a one-stop shop.   The advantage being that you can trade more than one account without having to worry about the costs of having to move money around.

All right –In the next Episode, we’ll be looking at the all-important techniques for managing risk. In the meantime, if you’d like further information, visit our web site at hometrader.com.au, and book in to one of our free 2-hour Information seminars.