I can almost hear you say that you understand buying something and selling it again but the concept of selling something first then buying it back is a strange one. I can understand that, but it really is just terminology, a way of expressing something that is actually straightforward. Things will become much clearer when we look at examples.
The price quoted for a share if you look it up is the Market mid-price. This is the mid-point between the upper (buy) price and the lower (sell) price in the market. In other words, the middle of the market spread. The spread trading company will have a slightly wider spread than this and it may not always reflect the exact position of the market price. Let's look at some examples.
Below in Figure 1 is a line chart for Ultraframe PLC showing the price movement from 23rd October 1997 to 7th June 1999.
As an example of a long trade, let's say that on the 18th January '99 (represented by the arrow) we decided that the price was going to continue to rise so we would enter a 'long' trade.
(Don't you wish you could trade with hindsight!).
Let's now take a closer look at that part of the chart to see how the trade would have worked.
N.B. It is important to remember that when looking at UK share prices, they are always quoted in PENCE (US shares are quoted in Dollars). You will see in the chart above (left and right scales) numbers like 240 & 400. This represents 240p and 400p (£2.40 & £4.00). You need to get used to prices expressed in pence with each penny representing a 'point' - more of this later.
Figure 2 shows a close up of the long trade on Ultraframe.
The market mid price at the open was 284 (£2.84). The price (spread) offered by the trading company at that time was:
281.0 to 289.5 (a spread of 8.5).
We always buy to go long at the higher price or buy price, so we buy at 289.5.
At the close the market mid price was 351 (£3.51). The spread offered by the trading company was:
348 – 356.5 (spread is still 8.5).
We always sell at the lower price or sell price to close a long trade, so we sell our position to close it at 348.
So our profit on Ultraframe is 348 minus 289.5, which is 58.5 pence, usually referred to as points, one point being a penny.
How our 58.5 points profit tuns into hard cash we will look at in a moment.
In the next page we will now look at an example where you think the price will fall. Here you will go 'short'.
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