Buying and selling are fundamental concepts in trading that determine the price of an asset at any given time. These concepts are crucial for traders to understand because they determine the profit or loss on a trade. In this article, we will explore the basics of buying and selling and how they work in trading.
The Impact of Buyers and Sellers on Market Prices
When it comes to trading, 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 there are many sellers and few buyers, then the supply will outstrip demand, and the price will fall. Conversely, if there are many buyers and few sellers, then demand exceeds supply, and the price will rise.
The Role of Buying and Selling in Everyday Dealing
Buying and selling are not just how prices are set, but they are also an essential part of everyday dealing. The fundamental principle behind any trade is to make a profit, which is determined by the difference between the opening and closing price.
For example, suppose you decide to buy the DAX at 13,000. You’ll close your trade by selling the DAX, so you’ll want the index to be above 13,000 to make a profit. If you close when the DAX is at 13,100, then the market has moved 100 points in your favor. However, if you close when the index is at 12,900, it has moved 100 points against you.
The 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, and 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. For instance, if the current market price of an asset is $100, the bid may be $99, and the ask may be $101.
The Spread
The spread is the difference between the bid and the ask prices and is an essential factor to consider when calculating your profit or loss from a trade. In our earlier example, when the DAX is at 13,000, it might have a bid of 12,999 and an ask of 13,001. To buy the DAX, you would open at 13,001. You would need the DAX’s bid price to move above 13,001 before you can earn any profit from your trade. If the DAX moves up to 13,002 but its bid is 13,000, then you would still make a €1 loss.
In conclusion, buying and selling are fundamental concepts in trading that determine the price of an asset at any given time. These concepts are crucial for traders to understand because they determine the profit or loss on a trade. By understanding the bid and ask prices, traders can make informed decisions about their trades and increase their chances of success in the markets.
