Section #2: Prices, Order & Trading (Stocks)

Bid Price

The highest price a buyer is willing to pay for a stock

Ex: One buyer is willing to pay $175.10, another buyer is willing to pay $175.20, the second buyer wins

Ask Price

The lowest price a seller is willing to accept for a stock

Ex: One seller is willing to sell for $175.40, another seller wants $175.50, the first seller wins 

Spread

The difference between the bid & ask price which shows how much “gap” exists between what buyers want to pay and what sellers want to receive — measures market liquidity 

Ex: Bid price: $175.20, ask price: $175.40, spread = $0.20

Market Order

An order to buy or sell a stock immediately at the best available current price

Ex: (Bid: $175.20, ask: $175.40) If you place a market order to buy, your trade will fill instantly at the ask price, because that’s the lowest price a seller is currently offering

Limit Order

An order to buy or sell a stock only at a specific price or better

Ex: You want to buy AAPL currently trading at $175.40, but you only want to pay $175 or less. Buy a limit order at $175, if price drops it will automatically fill, if price doesn’t drop the order will sit open and may not execute

Stop Loss

(Stop Order): An order than automatically sells or buys a stock once it reaches a specific price, to limit loss or protect profit — guarantees execution, not price

Ex: You own stock currently trading at $175, but you want to limit your loss if the price drops. Set a “stop loss” at $170 , if stock falls to $170 your order triggers a market order to sell your shares immediately at the next available price.

Stop-Limit Order

An order that becomes active when the stock reaches a set stop price, but it will only execute within a specific price range (the limit price or better) — controls price, not execution

Ex: Set 2 prices (system will only try to sell within stop (when to activate) & limit (worst price willing to accept) — I own stock at $175, I set stop at $170 & limit: $169.50. Stock drops to $170 and activates, stock falls to $168 the order won’t execute 

Day Order

An order to buy or sell a stock that is only valid for the current trading day — if not executed expires by the end of the day automatically 

Ex: Set an order for AAPL at $170, the stock doesn’t drop to $170 today and the market closed at 4PM, your order expires automatically and try again tomorrow with a new order

GTC

(Good ‘Til Canceled): An order to buy or sell a stock that remains active until it either executes or you cancel it

Ex: Want to buy stock currently trading at $175, but only if drops to $170. Scenario 1 — stock drops, order executes. Scenario 2 — stock doesn’t drop for weeks, remains open until it drops or you manually cancel

Execution

The completion of a buy or sell order in the stock market

Ex: The moment an order for a trade is done (whether buy or sell) ownership has been officially transferred 

Position

The total amount of a particular stock (or other security) that you currently own or owe — shows your exposure in the market

Ex: Bought 15 shares of AAPL at different times, position in AAPL is 15 shares

Long Position

Owning a stock with expectations of prices rising — profit if the prices go up

Ex: Buy hoping prices will increase

Short Position

(Short Selling): borrowing a stock with expectations of prices falling — profit if the price goes down

Ex: Sell borrowed shares hoping prices will decrease

Margin Account

A brokerage account that allows you to borrow money from your broker to buy more stocks than you could with your cash

Ex: I have $5k cash in my brokerage account, broker allows 50% margin (I can borrow $5k from broker), I now have $10k total to buy stocks

Leverage

Using borrowed money to increase the potential return (or loss) on an investment (essentially amplifying your investment power using debt)

Ex: I have $5k cash and use margin to borrow $5k, I have $10k to invest. Stocks rise to 10% - $11k, repay $5k & $5k I started with and $1k is left. Profit on $1k on original $5k is a 20% gain (amplified)

Call Option

A contract that gives the buyer the right, but not the obligation, to buy stock at a specific price (strike price) within a certain time period

Ex: Strike price (willing to buy stock at), profit if market rises above — strike price $180, stock rises $190, buy at $180 & sell $190 for $10 profit

Put Option

A contract that gives the buyer the right, but not the obligation, to sell a stock at specific price (strike price) within a certain period of time

Ex: Strike price (willing to sell stock at), profit if market falls below — strike price $170, stock falls to $160, sell at $170 & buy back at $170 for $10 profit

Expiration Date (Options)

Last date on which an option is valid or can be exercised

Ex: Option expires November 30, exercise option before deadline for profit opportunity, if expires the option is worthless

Strike Price (Options)

The predetermined price at which they buyer of an option can buy (call) or sell (put) the underlying stock if they choose to exercise the option — agreed-upon price option

Ex: Strike price $180, current stock is $185, allows you to buy at $180 regardless of market price 

Premium (Options)

The costs to buy an option or contract

Ex: Strike price $180, current price $185, premium $5/share

Lot Size

The number of shares or units of a stock, option or other security that are traded as a single unit (usually 1 lot = 100 shares) 

Ex: Want to buy 1 lot of AAPL, your order will be 100 shares at a time, which is the standard trading unit for the stock

Liquidity Risk

The risk that you cannot quickly buy or sell an asset without significantly affecting its price (not being able to convert an investment into cash easily) — high or low

Ex: I own shares of lesser-known company that trades only a few hundred shares a day, want to sell 100 shares, possibly no buyers at my price so may have to accept a much lower price (high liquidity risk)