In our last blog, which you can read here, we covered buying stocks long and selling them short. Today we are going to cover a few commonly used trading terminologies such as bears, bulls, open, and close.
A bear market is generally defined as an overall downturn in the marketplace. The length or period of a downturn can range from weeks to even years, depending on the current economic outlook. Usually, a bear market is confirmed when market indicators such as the S&P 500 drop twenty percent or more in a given period. The impact of bear market is usually considered to happen market-wide across all sectors, but individual stocks can be considered in a bear market even if the S&P 500 is showing a strong market. All it takes is for a stock to drop twenty percent or more over a given period. Needless to say, most bear markets are greeted with investor pessimism as long term investors only make money when the market is up or in a bull market.
A bull market is a period where the stock market sees overall growth and gains. During this period, investors are generally positive on their market outlook, and long term investing in companies is encouraged. Unlike a bear market which can be clearly defined, identifying a bull market is more open as it is generally agreed upon by universal outlook and company growth instead of a percentage of market growth. As with a bear market, a bull market usually happens across all sectors of the stock market as indicated by the S&P 500, but it is possible to see individual stocks make gains over a long period even when the overall market is on a downturn.
There are two ways to open a new trade position in the stock market. If you wish to purchase stock and hold on to it for a while, this is known as a buy to open position as you have bought stock at the opening of the transaction and you are holding on to actual company shares in your account. On the flip side, if you wish to sell or short a stock, you need to sell to open as you must sell a stock at the start of the transaction. Both methods open a trading position on the market: with buy to open, you own the stock, and with sell to open, you have sold stock which you need to purchase now to fulfill your end of the transaction.
This brings us to closing a trade; once you have an open position, you need to close it when the time is right. If you have purchased stock and are holding it, then you will need to sell the shares of stock you are holding to end or close your open position. Selling your shares of stock to another buyer is known as a sell to close. On the other side of the coin, if you are purchasing stock from another seller to fulfill an open position, this is known as a buy to close as you are buying shares of stock to close out your open trade. Both methods close a trading position, with the sell to close, you sell the stock you own, and with a buy to close, you purchase stock to fulfill or cover your open position.
In closing, understanding these few terms will help open the doors to trading as we take a closer look at more topics in the weeks ahead.