Welcome to part three of our blog series: A Trader's Journey, where we are covering the first tier of the Foundations of Trading class program. Today's blog will cover the teachings in class 3, and if you wish to review our previous blogs in this class, please click on the Foundations of Trading blog category on the right-hand side of the page. That will instantly bring up all the blogs from this series that you can read. As for today's topic, we are going to cover buying stock long and selling stock short.
There are many strategies when it comes to purchasing stock, but the most well-known method is the buy and hold approach, which is also known as going long. When you go long on a stock, you are purchasing shares in a company with the long-term belief the stock in question will increase in value over the following weeks, months, and even years. This position is more of an investor's mindset than a trader's.
There is nothing wrong with investing in a company; however, it is best to understand your goal with each stock purchase before diving into them. In this case, if you are looking for a stock to increase in value and maybe even pay out a few dividends in the meantime, then this approach is right for you. Buying and holding is a great way to get into the market as it takes a lot of emotion out of the trading equation; once you purchase the stock, you let the company do what they do best: grow. You keep your eye on the long play, which means you can walk away from watching stock prices bounce around on a daily basis and focus on other priorities in life. Again, you let the company work for you as they strive to increase their bottom line.
Thus, there are some excellent upsides to the buying and holding approach. However, the main downside is holding said stock for an extended period will tie up your liquid capital. Purchasing a stock can be expensive, and purchasing more than one share can quickly add up. So, if your investment/trading account is on the smaller side, you might want to consider other trading options before locking in all your capital on one company in the hopes of a huge payout in the future.
When you are expecting a stock to grow in value over the long term, you usually use the buy and hold approach. However, there is a flip side method as well, which is called short selling. In this strategy, you are expecting the price of a stock to fall. So you, as a trader, sell a stock that you do not yet own with the belief it will fall in value. Once the stock falls in value, you purchase the number of shares needed to cover your original sale. The difference between what you sold the stock for and what you purchased the stock for is your profit.
For example, you have reviewed company ABC's data, reports, and candlestick charts. You believe everything points to a drop in the price of ABC's stock. ABC is currently trading at 55.00 dollars a share, and you sell ten shares at that price point, which means someone paid you 550.00 dollars for ten shares of stock that you do not currently own. Over the next two days, ABC's stock drops in value to 45.00 dollars a share, just like you predicted it would. Now, you are ready to close out of your open position and purchase ten shares of ABC's stock for 450.00 dollars. Your net profit on this trade is 100.00 dollars.
As you can see, it is possible to generate profit in the stock market regardless of the way the market moves. If it goes up, you buy long, and if it goes down, you can sell short. Granted, both positions should only be entered into after carefully researching the current market and company trends, but they are viable strategies at the right time. Thank you for reading and join us next week as we cover class 4 and using indicators when trading.
Finally, if you are looking to start your stock trading journey, then follow this link to purchase the recordings of the live Foundations of Trading classes which you can review as many times as you would like. Plus, after you purchase, join us on our discord server to answer any questions you may have. Thank you!