Buying And Short Selling Stocks
Hello, traders. Welcome to the stock training course and the first module introduction to stocks. In this lesson, we’re going to talk about how buying and short selling stocks, or shares, work. So, where can you buy stocks or shares from a company? That’s easy.
You can buy shares through an online broker. This works the same as buying any futures contract or going long on a currency pair. You just send the buy orders through a broker, the broker will direct your order to an equity pool, on which you will be paired with a counterpart at the best ask price. This means that you no longer have to go and physically buy the shares from a bank or a broker. You can do so with an online broker just by sending the order through them.
Normally, there is no leverage in stock trading, and when I say normally, there’s actually no leverage in stock trading. This means that you have to have the entire amount for margin requirements. Now, let’s go through an example, and let’s say that you want to buy 100 shares of Apple at the current market price, which is $109.58. You have to have at least $10,095.80 in your account for the trade. If you don’t have that amount, you can’t buy 100 shares, and you will have to buy less shares for your trade.
Now we have a shortcut for this, for you. I mean, not everybody has $10,000 in their trading account, and you might have less, and you might want to trade shares. The shortcut is doing this through CFDs. There is a way to trade large positions with small margin requirements, and that is going through contracts for difference, CFDs. What CFDs are is an agreement between two parties, usually the trader and the broker, on which the difference in price at the close of the trade is the profit or loss for the trader.
Now let’s say that you want to buy shares of Apple at $100…at $109.50. If you buy CFDs at this price and you close your trade at $110.58, you are going to make $1 per CFD that you bought. And remember, when you are trading CFD’s you don’t take ownership of the share. This means that you don’t own the company, you are just trading a… or better yet, you are just betting on a price movement, Now, the price of the CFD is the underlying price of the stock. This means that if you are looking at Apple and Apple CFDs, the price is going to be the same. This means that at the current market price, the CFD price and the shares of Apple are going to be worth the same, which means that they are going to be worth $109.58.
You usually have 1 to 10 leverage when trading CFDs with brokers online. This means that, for the previous example of Apple, you will have to have only $1,009 in your account to trade 100 shares through CFDs. Now, this is much better because you don’t have the large margin requirement when trading actual stocks. The downside is that you don’t take ownership, but because we are traders, we actually don’t care if we own or not the shares because we are only trying to profit from small price movements.
So CFDs is a great shortcut for you for all traders who don’t have large accounts with the brokers. The cool thing about CFDs also, is that the pattern day trader rule doesn’t apply. This means that you can make as many trades as you want with only $1,000 in your account. The difference is that with an actual stock account, you have to have at least $25,000 in it for you to be able to make as many trades as you want on a weekly basis. If you don’t have at least $25,000 in your broker account, or your stock trading account, you only can make three or four trades per week.
So how does short selling shares work? Well, it’s completely logical. You can’t sell something that you don’t own. So you can’t…I mean it’s logical that you can’t sell shares that you don’t own to profit from a negative price movement. So how can you bet on the downside of a company? Do you have to buy the shares first? That is the normal question traders ask themselves when they don’t know how short selling works. Well, the short answer is no.
You can sale shares from a company to profit from a negative price movement without owning the shares. This is called short selling. In this case, the broker will lend you the shares for you to sell and buy back at a lower price for a profit, okay? The shares that the broker will lend you are the shares that are owned by the broker’s clients and are in its stocks. Remember that, well, when the clients buy shares they are stocked in the broker. So, the broker will lend you these shares for you to sale them and buy them back at a lower price, and then return them back to the broker.
So short selling shares of big company is not a problem. There’s always liquidity and shares available. But when it comes to more elaborate companies, the shares might not be available for short selling due to the lack of stock in the broker. But again, there’s a shortcut, and this is short selling with CFD’s, which is actually, don’t call short selling, just selling because remember that with CFD’s you don’t take ownership of the shares. So you would just enter an agreement with the broker that you will profit or loss from a different in price at the time of the close of the trade.
So short selling with CFDs is easy. It’s as easy as going short on the Euro-US dollar. Because you don’t have ownership with CFDs by contract for difference, the availability for selling is not an issue here. So you can always bet on the negative side of companies with CFDs.