In Stock Trading For Beginners you learned what it means to be long a stock. When you go long, you are hoping that the price of that stock goes up in price. You buy to get into a position,and you sell to get out of that position. Your are hoping to “Buy low, sell high,” in that order.
Next in How To Short Stock, I talked about what it means to be short a stock. When you take a short position you are hoping for the price to go down. In this case you are, “Selling high, buying low,” in that order. You sell first, then buy at a later date, and hopefully for a lower price.
Every Trade Has 3 Phases
- Open the trade
- Close the trade
Whether you are selling stocks or options (or even crypto, cars, real estate, beenie babies) there are only 3 phases of every trade. Whether you are long or short, there are 3 phases.
Opening a Stock Trade
If you are long a stock, then you will buy the stock. You will place a BUY order to open the trade.
If you are SHORT a stock then you will be selling the stock. You place a SELL order to open the trade.
Activity of a Stock Trade
After you open the position, the stock will go up, go down, or stay relatively the same. The value of the investment will be a gain, a loss, or a little of both. Markets move, and it is very rare that you open a position and it goes your way immediately and stays that way.
Closing a Stock Trade
After some time you will probably want to close your trade at a gain, or a loss, or a scratch if it isn’t really going anywhere. To close your position, you just do the opposite of what you did to open the trade.
If you were long when you opened the trade, you will SELL your position to close it.
If you were short when you opened the trade, you will BUY your position to close it.
Either way, the difference in price between your opening trade, and your closing trade, will be your profit or loss.
Check out his awesome video from the creators of tastyworks.
How the Stock Market Works
Most people think the only way to make money in the stock market was to buy some stocks, hope they go up, and sell them. But now you know that you can make money if the stock goes up or down.
When trading stocks, the activity period is undefined. You can hold on to that stock for as long or as short as you want to. You really don’t know how long your money is going to be tied up.
One of the upsides of being long a stock is that your reward is undefined, because there is no upper limit to how high a stock can go. Your risk is defined when you are long a stock, to the price you paid for the stock. It can only go to zero, and in that case you will lose all of your investment, but hopefully you close the position before that happens.
When you go short on a stock, your risk is limitless, because there is no upper limit to how high that stock can go. Your max reward is defined, which would be in the case of the stock going to zero.
Why You Shouldn’t Trade Stocks
Trading stocks is a great way to make money, but stocks are expensive and since the activity period is undefined, you can’t really be sure how long your money will be tied up before you see a return.
The better and more efficient way to use your capital, and that is I recommend that you learn how to trade stock options. In the next pages, I will go over
- What are stock options
- How stock prices affect stock options
- How time is on your side with stock options
I will be showing you how I use what I consider the best online broker for stock options, tastyworks, and will give real examples of trades that I actually make from my own personal account.
Until then if you have any questions, comments, or just want to chat, leave a comment below, and I will be sure to get back to you.