Before continuing, the following key terms regarding how trading stocks works will be defined:
- Going long – buying a stock.
- Selling long – selling a stock.
- Selling short – selling a stock that the seller does not currently own (and will have to be brought in the future). This will be explained later.
- Covering short – buying a stock previously sold short.
- Round lot – for reasons of convenience, brokers take buy and sell orders in multiples of 100 shares (except for certain stocks with higher nominal prices).
- Odd lot – Orders for numbers of shares that are not multiples of 100. Because these orders are more complicated, a higher commission is charged to transact them.
- Combined demand for a stock – the total aggregate demand for a specific stock, at a given price and time.
- Combined supply of a stock – the total aggregate supply of a specific stock, at a given price and time.
- Cash volume – the amount of money that changes hands during a given time period (an hour, a day, a week, etc.). For example, if 100 shares of Citigroup are traded during one day at an average price of $4.00 per share, the daily volume of Citigroup for that day is $400.
- Opening price – the price at which trading of a certain stock commences. The closing price of a stock ecomes that stock’s opening price the following day.
- Closing price – the final price of a stock at the end of the trading day.
- Order book – the order book resembles a digital warehouse in the stock exchange computer systems into which all orders are recorded.
These are just the basic terms regarding how trading stocks works. We will elaborate on the next pages.