What is buying and selling in trading?

What is buying and selling in trading?

Buying and selling in trading
Photo by @doondevil

Trading is all about the laws of supply and demand. If a lot of people want some stock/currency, then its price goes up and if few people are interested, its price goes down. When you’re trading in the financial markets, everyone wants to make money. Buyers want the market to rise, sellers want the market to fall. 

A common question is “What is long and short in trading?” What does it mean when you hear it said that buyers and sellers go long or short. These are concepts that we will discuss in more detail here. 

How To Buy and Sell

Imagine your local street market where a fruit and veg vendor is trying to sell his goods at a healthy profit. He has to fine tune the price of his stock throughout the day because he doesn’t want to be left with too much unsold or out-of-date stock at the end of the day.

Earlier, the vendor will have bought his fruit and veg from a wholesaler, who acts rather like their broker. Suppose at the end of the day someone comes and takes both the wholesaler’s and vendor’s excess fruit and veg before the street markets close for the day. You’ll probably have a happy vendor and wholesaler!

This street market contains micro-markets within the broader market and trading decisions are taken by all participants throughout the day as the market functions. It’s possible that both the vendor and the wholesaler had someone lined up to buy their excess stock at the end of the day. In which case they have used hedging principles to minimise their losses.

Financial markets are similar. You buy and sell through your broker on your trading platform and you get a wide range of products to trade; stocks, equity indices, cryptos, forex pairs, etc.

Prices will vary depending on supply and demand which, in turn, is influenced by market forces – anything from the weather to politics, from a company’s trading results to a natural disaster. The overall cost of trading (the spread and commissions) will vary and become more competitive as the volume of trading increases.

Example: Trading commodities

Imagine now that you are interested in buying and selling commodities.You might want to buy and sell precious metals and oil on your platform. You know that the price of oil is affected by demand, supply, weather, global GDP, production issues etc. 

Right now, you may consider selling oil because you think global output looks weak. You expect the demand for oil to go down. Whenever you think that sentiment has weakened for certain commodities like oil, you can sell them through your platform. By contrast, if you believe that the market looks strong, you foresee a significant increase in the demand for oil, you might decide to buy.

You are described as bullish if you think markets will rise and bearish if you believe they will fall.

Long and short

These kinds of market sentiments have become part of the language of trading. If you believe the markets are going to rise (a bull market) you may decide to ‘go long’. This simply means you want to buy.

If you think the markets are going to fall, you might go ‘short’. This means you want to sell your product because you think prices will go down.

On your trading platform, the act of buying and selling couldn’t be simpler. There are generally two buttons – one red and one green or blue. The ‘sell’ button is usually red and the ‘buy’ button is blue or green. Between the red and green buttons, you are likely to see the spread quoted between two virtual buttons.

How does the spread work in the Forex market?

Take a currency pair such as EUR/USD. You will normally see two prices – a sell price of 1.1741 and a buy price of 1.1742; the spread is therefore 1. The cost (the spread) is the difference between the two prices quoted and is generally the total cost of executing that order unless a commission charge is added.

If you think EUR/USD will fall you click the red button to sell. Within milliseconds, your broker sends your order to the market to be fulfilled at a price as close to the price quoted on your platform as possible.

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The role of Buying and Selling in Trading

While buying and selling obviously are the crux of trading, they also have another role. They help markets to find the right price for a product – known as price discovery. The more active buyers and sellers are, the more efficient the market becomes. And the more participants are involved, the easier it is to discover what the right price for a product is. 

It’s a bit like a tug of war, buyers one side sellers the other. The weight and strength of one side will eventually win, and the price is discovered.

In the forex market international trade needs forex trading to operate seamlessly. Whether you are a car manufacturer in Europe or a pharmaceutical company in the USA, you need to exchange your currencies at the best possible prices to protect your business across international borders. To help you do this efficiently you will go to a broker (say a large investment bank) who will help you to complete your trade on the forex market

With some $5 trillion of turnover and billions of transactions each day carried out by tens of millions of participants, the market is one of the most efficient there is. Prices should be fair, the cost of transactions should be very competitive, and it is unlikely that the market will ever be short of buyers or sellers.  

How Do Buyers and Sellers Affect The Markets?

Buyers and sellers and the volumes they trade can impact the markets directly. It’s a matter of supply and demand. If demand outstrips supply, then sellers hold the cards and can charge high prices. If sellers have a plentiful supply, then buyers are in control as prices should fall.

It’s easy to see this in the commodities market. If, for instance, there’s been a poor wheat harvest, and the weather outlook for the next growing season is poor, then wheat prices might increase significantly on the futures/commodities markets. In this case, demand might outstrip supply because the need for wheat-based food doesn’t go away. 

By contrast, at the beginning of the 2020 COVID pandemic, oil prices crashed. Travel, both domestic and international was severely restricted and there was a glut of oil in the markets. The price of oil even went negative at one stage. Buyers were non-existent and storage of excess oil became an enormous problem with oil tankers left adrift on the open seas with nowhere to dock to unload their product.

 

Buying and selling
Photo by @lelia_milaya

What To Buy and Sell?

We’ve talked about the vast array of financial products available through your broker for you to trade on your trading platform. These include shares, forex pairs, equity indices, commodities and cryptocurrencies.

Forex or commodities

How do you decide on a market?

If you have an interest in and understanding of macroeconomics then trading forex or commodities might be appealing. Both of these sectors are influenced by both global and domestic events. Suppose the World Bank states that global GDP will fall because manufacturing and productivity are weak, then the price of oil and other commodities will probably fall. As a result, the U.S. dollar (remember commodities are usually priced in dollars) might weaken. 

Forex is influenced by macroeconomics and domestic economics in a similar way. In the UK, Brexit is a good example. 

Recently there have been a number of stories in the media to suggest that the U.K. may not succeed in negotiating a trade agreement with Europe and may be heading for a hard Brexit.  When such stories break, the value of the British pound falls. And four years ago just after the referendum decision, when the Bank of England intervened to protect the pound, they also lowered interest rates, piling more downward pressure on the value of GBP.

Shares or equity indices

Many traders like to trade shares and equity indices as they have watched and heard about these key markets over the years. They are quite easy to understand and you can spread your risk by trading, for instance, the U.S. 30 Index (the 30 biggest quoted firms in the USA) or perhaps the U.K. FTSE 100.

Alternatively, you may prefer to trade individual stocks in sectors that you know something about. The FAATMAN stocks; Facebook, Apple, Amazon, Tesla, Microsoft, Alphabet (Google) and Netflix are a well-known group of shares and many people are familiar with the way these companies work.

Lately, it’s clear that tech stocks such as Amazon and Netflix have soared during the coronavirus pandemic. The tech index the NASDAQ also rose sharply during the shift to WFH (work from home) and the home shopping and entertainment explosion.

Buying and Selling Summary

We’ve discussed buying and selling in financial markets, how you do it and what you can sell. We’ve also briefly talked about the way supply and demand affects prices in the financial markets and touched on the concepts of going long and going short. 

In the next lesson we’ll discuss short and long trading in more detail.

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