Driven by increased smartphone accessibility, the need for alternative income streams, as well as lower-cost, user-friendly digital platforms, online share trading is gaining popularity. However, complicated trading jargon can function as a barrier for prospective investors wanting to start their share-trading journey.
From bid-ask spreads, to limit orders and long and short positions, this type of jargon can make the stock market world feel complex. But at its core, investing in shares is not complex – you are simply buying a piece of a business that is listed on an exchange, and ideally, over time, that business grows.
Making sense of a trading screen
For first-time investors, the complicated terminology on your trading screen can be intimidating. Understanding these basics can help you avoid costly mistakes.
Ask price: This is the buying price and is the lowest price a seller is willing to accept for their asset. It is the price you pay as the investor when you buy a share.
Bid: This is the highest price a buyer is willing to pay for an asset. It is the price that you receive when you sell.
The ask price is always higher than the bid price and the difference between the two is called the spread, or the bid-ask spread. If you have a very narrow spread in a stock, it means the stock is highly liquid. An example of this would be a mega-cap stock, such as Apple Inc. Whereas, if you have a very wide spread, then it suggests an illiquid stock, usually found in your small-cap stocks, or those with a smaller market capitalisation of between $250 million and $2 billion.
Once you understand bids, ask prices and spreads, you can decide how you want to trade – via a limit order or a market order. Understanding when to use one or the other is critical, as an incorrect decision can lead to higher-than-expected costs or even unfulfilled orders when you trade.
A limit order is an order to buy or sell stock with a restriction on the price to be paid or the price to be received. This gives you control over the price. Understanding the spread is critical when entering a limit order, as it represents the gap between supply and demand in the market, allowing you to set an accurate limit order to ensure your trade fills at your desired price rather than the market price.
A market order is an order to buy or sell immediately at the best available price and is typically used if you want a quick exit, as it prioritises speed of execution. Another concept to consider is whether your share is trading ‘cum’ the dividend, or ‘ex’ the dividend. When a share is trading cum, it’s trading at a higher price because you are entitled to the dividend – this attracts a premium reflected in the higher price. Once the dividend is paid out, the share price tends to drop. When a share is trading ex-dividend, it means you will not receive the dividend. Understanding dividend payout dates is therefore important as it impacts when you buy. Your chosen trading platform must make a contract note available to you. This is your record of ownership of the share, and sets out the transaction details, including the execution price and the fees.
A stop loss order and a take profit order are great ways to either limit your losses or make sure that you realise profit for your longer-term goals. A stop loss position allows you to close a position at a particular price that might help you limit potential losses. A take profit allows you to realise your profit at a specific level. These mechanics allow investors to set up strategic guardrails that apply the discipline needed to lock in returns in certain trading scenarios.
Going long or short
Analysts, investors and market makers often refer to long or short positions when speaking about stocks, particularly when talking about derivatives.
These positions refer to two different approaches to capitalising on price movements. A long position refers to the purchase of a share when you are expecting the market to appreciate over time. The same as being bullish, the investor is aiming to realise a profit over the long term by selling that asset at a higher price.
Short positions involve selling a borrowed asset, anticipating that the price will go down. The investor then later repurchases that asset at a cheaper rate, ideally making a profit from the price difference. With a negative view of stock performance, a short position is bearish, and investors tend to avoid this highly speculative approach. While it is more complex and riskier, it can offer a valuable hedging mechanism – especially during market downturns and volatility.
The biggest risk is not taking one at all
While the terminology around trading in shares can feel overwhelming, investing becomes far less intimidating once you understand the mechanics behind trading and how markets tend to operate. Start small until you feel more comfortable – the biggest risk is not taking one at all. A reputable financial adviser can provide guidance and walk your investment journey with you.
Written by Wendy Myers, Head of Securities, PSG Wealth