Explanation of buying and selling

The process of buying and selling is fundamental to trading. It determines the value of an asset and the profit or loss you can achieve.

As explained in the course Introduction to Financial Markets, the ratio between buyers (bulls) and sellers (bears) at any given time influences the price of the market.

When most participants are trying to sell, supply exceeds demand, and the price of the asset decreases. Conversely, if there are more buyers, demand surpasses supply, and the price rises.

Buying and selling, however, is not just about determining prices – it is a critical part of day-to-day trading.

Trading with Buying and Selling

• Supply and demand: How it works
• What is a spread?

The core idea of trading is to generate profit based on the difference between the price at which you open a position and the price at which you close it.

Imagine you decide to invest in the USD/CAD currency pair, which currently stands at 1.2779.

If USD/CAD rises to 1.2979, it means the US dollar has strengthened against the Canadian dollar. Your profit or loss will depend on the extent of the price movement—in this case, 200 points. If you buy 10,000 units of USD/CAD, you would gain $200.

Conversely, if USD/CAD falls by the same 200 points, you would lose $200.

Supply and demand: How it works

When observing financial markets, you will always notice two prices displayed. The price on the left represents the bid (supply), while the price on the right indicates the ask (demand), sometimes referred to as the offer.

• Selling: If you are selling, your transaction is based on the bid price.

• Buying: If you are buying, the trade is executed at the ask price.

The bid price is always slightly lower than the current market value, while the ask price is marginally higher. This difference is referred to as the spread.

What is a spread?

A spread represents the difference between the bid and ask prices and plays a crucial role in determining potential profit or loss in a trade.

Let’s consider an example: If EUR/USD is at 1.1259, the bid price might be 1.1257, and the ask price 1.1260. If you choose to buy EUR/USD, you would open your position at the ask price of 1.1260.

To make a profit, the bid price for EUR/USD must exceed 1.1261. If the market moves up by 2 pips to 1.1261, but the bid price remains at 1.1259, you would still close the trade without any profit or with a slight loss.