ANSWERS: 1
  • A stock trade is claims to company earnings changing hands. Stock can be acquired with a "buy low, sell high" goal. Short-selling allows profit from stock price decreases. Trading fees always work against you. Keep a time frame in mind; potential profits can turn into losses surprisingly fast.

    Buy and Sell

    Buying a stock means you've purchased claims ("shares") to portions of company profit. If the stock price rises, you can sell those shares at a higher price.

    Selling Short

    If you anticipate a stock price will decrease, a broker can sell shares at the current price (sell short) in your name.

    Buying to Cover

    Eventually, brokers want their stock back. You must buy the shares for them ("buy to cover"). If you sold-short for $10 per share, and bought-to-cover at $7 per share, you get profit of $3 per share.

    Transaction Costs

    Trading entails transaction costs that work against you. If it costs $15 to buy stock and another $15 to sell, it will take $30 of stock price gains (capital gains) just to break even.

    Trading Time Frame

    Some like to trade on a weekly or monthly basis. Others prefer to enter (buy or short-sell) and exit (sell or cover) the market once every several months or years.

    Source:

    "A Random Walk Down Wall Street"; By Burton G. Malkiel, Dec. 2007

    "One Up On Wall Street"; By Peter Lynch with John Rothschild, 1989

    Investopedia: What is Short-Selling

    More Information:

    Department of Economics, University of California Berkeley: Financial Economics

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