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How to trade

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Buying and selling

2.5-minute read

Buying and selling is trading at its most fundamental. It determines your profit, and the price of an asset at any given time.

As we covered in the Introduction to financial markets course, the number of buyers (or 'bulls') versus the number of sellers (or 'bears') in a market at a given time will directly impact its price.

If lots of people are trying to sell an asset, then supply will outstrip demand, and its price will fall. If most traders are trying to buy, on the other hand, demand exceeds supply, and its price will rise.

But buying and selling isn't just how prices are set – it's also an essential part of everyday dealing.

Buying and selling in trading

The fundamental principle behind any trade is to make a profit, which is determined by the difference between your opening and closing price.

Let's say you decide to buy the DAX when it is at 13,000. You'll close your trade by selling the DAX, so you'll want the index to be above 13,000Buy to make you a profit.

If you close when the DAX is at 13,100, then the market has moved 100 points in your favour. If you close when the index is at 12,900, it has moved 100 points against you.

Let's say you have a position that earns you €1 for every point that the DAX moves:

Buying at 13,000 and selling at 13,100 makes you €100
Buying at 13,000 and selling at 12,900 loses you €100

Example of a DAX buy position on a chart

Bid and ask prices

Whenever you view a financial market, you'll see two prices listed. The price on the left is the bid and the price on the right is the ask (sometimes referred to as the offer).

When you sell, you trade at the bid
When you buy, you trade at the ask

Bid and ask price examples

The bid will always be lower than the current market price, while the offer will always be higher.

What is the spread?

The spread is the difference between the bid and the ask prices, and is an important thing to when calculating your profit or loss from a trade.

Let's return to our example above. When the DAX is at 13,000, it might have a bid of 12,999 and an ask of 13,001. So, to buy the DAX, you would open at 13,001.

You would need the DAX's bid price to move above 13,001 before you can earn any profit from your trade. If the DAX moves up to 13,002, but its bid is 13,000, then you would still make a €1 loss.