In this edition, we are going to cover these stock trading topics:

• The bid and ask

• When to sell

• When to buy

The bid and ask

The stock market consists of buyers and sellers. These buyers and sellers could be investment funds, retail investors, hedge funds, traders, banks, etc. 

If you want to buy a stock, you have to place an order saying how many shares you want and what price you are willing to pay. Sellers have to do the same.

When a buyer places an order, it is called a Bid. When a seller places an order, it is called an Ask. Bidders want to pay less and sellers want to sell for more, so there is a difference in price between the highest bid (buyer) and the lowest ask (seller). That is called the bid-ask spread.

Beware of the bid-ask spread

The bid-ask spread will tend to be lower on popular stocks where there’s lots of trading. It will tend to be higher on smaller stocks which do not trade as much and it will be higher on lower priced stocks. 

Let’s imagine a stock that sells for about $100 and the bid-ask spread is 10 cents. If you bought that stock and instantly sold it again, you would lose 0.1%. But if a stock trades for $1 and the bid-ask spread is 10 cents, then an instant buy and sell would lose you 10%. The lesson is to be wary when buying and selling, because you can easily lose meaningful percentages when dealing with thinly-traded or low-priced stocks.

How stock prices move

On a day when a particular stock is in huge demand, there will be many bidders trying to get shares. To get those shares, they will try to outbid each other by offering higher and higher prices. Sellers are smart and will notice that, so they will start to sell their shares for higher and higher prices. The result is that stock prices will move upward.

On a day when there are more sellers in the market, they will try to outbid each other by selling for lower and lower prices. The buyers are also smart and will offer lower and lower prices for the shares. The result is that stock prices will move downward.

You get the idea.

Something else to be aware of - when you are trading stocks, you’re not only trading against other people. You’re most likely trading against computers and professional traders. How you can you tell? Sometimes you will notice that the market reacts instantly to new orders arriving or being executed. That speed is not humanly possible. Those changes are being made by computer algorithms. The lesson is to beware when you enter the market, you’re playing against professionals. 

But no worries, here’s a few of my tricks to help you win.

Sell into strength

When the market is going up, people naturally feeling like buying. The mood is infectious. 

You should consider doing the opposite. If there is a stock you want to sell or reduce your position in, an up-day is the day to do it.

The reason is quite simple, when everyone is clamoring to buy, they keep bidding up the prices and there is a high volume of shares being demanded. You can easily sell into that market strength, without pushing prices down or overwhelming the market with the volume of shares you want to sell.

Admittedly, this will not be a problem if you’re only selling a few shares. But if you have even a medium quantity of shares to sell in a stock that doesn’t trade many shares in a day, you can easily push the price downward with your selling. On an up-day, your selling can slip under the radar.

Buy into weakness

When the market is going down, people feel like selling. They fear losing it all and want to dump their shares.

Again, you should do the opposite. If there is a stock you want to buy or add to, a down-day is the day to do it.

The reason is that your buying will barely be noticed in the torrent of sellers. That means, your purchases will not have much of an effect on prices.

Also, if you can buy a stock 5% less than you could a week ago, why not? Who doesn’t love a discount. 

Conclusion

Trading shares is where the rubber hits the road in investing. After all your analysis and valuation, you have to go into the market and buy (or sell) those shares.

Trading is a craft in itself, so this primer is not meant to turn you into an expert. What it aims to do is demonstrate that there are a few points of return you can capture by trading smartly.

If trading is not your thing, call your broker and let them do it for you. There might be an additional cost, but if it takes the pressure off you, why not?

Remember, with Extraordinary Investing, we’re not chasing after 1% gains, we’re after the 1000% returns over time. So, don’t let trading dominate your investing. Trading is only a small part of executing on your investment plan.

In case you missed it, a few weeks ago we wrote an article on how to buy expensive stocks. It is not trading advice, but it is quite relevant in the current markets. You can find the article here.

I would like to hear what you’re up to.

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