Trading stocks and crypto may be a rewarding venture if you can define a good trading routine and a proper risk management. To start this journey, you need to equip yourself with a basic understanding of the terms used in the market. In this article, I discuss a few of such terms.
Spread: In the most simple terms, a spread is the difference between two price values. In the stock and crypto market, a spread may be the difference between the price an asset is offered for sale and the price buyers are willing to pay for the asset. It could also mean the difference between the price at which you buy an asset and the price at which you sell the asset at a profit, loss or a break even.
Support and resistance: Asset prices in the stock and crypto market keep going up and down based on supply and demand of the asset. An asset price may sometimes bounce up at a minimum price repeatedly within a given time. This may indicate a support price within the time period and can provide an entry or exit point in the market.
A resistance price on the other hand is an indication of a maximum price where an asset struggles to cross within a given time period. The asset price can be seen bouncing back repeatedly at the resistance. The resistance price may indicate a point to sell an asset (if you believe it will not go any higher) or invest in an asset if you believe the asset is going to break out (defeat the resistance and quickly move up).
Longing and shorting: Longing is the act of buying an asset (a stock or crypto asset) with the intention of holding unto it until its price goes up in order to sell for a profit. So you take a long position when your analysis indicates a potential upward price movement for an asset . Shorting on the other hand, is the act of borrowing stocks from a broker to sell with the hope that the price of the asset will go down in order to buy back the stock at a lower price to make a profit. Note that borrowing stocks comes with a price and therefore the profit you make is the price difference (between the original price the asset was sold in the market and the buy-back price) minus the amount paid to borrow the asset.
profit or loss = price asset was sold for - asset buy-back price - cost of borrowing asset.
If the price of the borrowed asset goes up instead down, you make losses because you have to buy back the asset at a higher price in order to return the asset at the end of the agreed duration of the lease.
Futures: Futures are financial security contracts that enforce the agreeing parties to buy or sell an asset at an agreed price within a time period in the future. A futures contract may obligate the buyer to buy or the seller to sell at the agreed price in the determined future even if the transaction does not favour one or both of the parties.
Options: An Options contract is similar to a futures contract, except the investing party acquires the right to buy or sell an asset but not the obligation to execute the transaction within the predetermined period.
A call option gives the right to buy an asset at a predetermined price before a date in the future. An investor may exercise their call option to buy an asset if the price of the asset rises above the agreed price. The investor may then immediately sell the asset in the market in order to make a profit.
A put option on the other hand gives the investor the right to sell an asset at a predetermined price before a date in the future. An investor may exercise their put option when the price of the asset drops in order to avoid making losses.