It’s actually easier than you imagine.
Buying and selling using an online trading platform is easy and simple but needs to be understood. I always get questions and concerns from traders who either are seeking some tips on how to get their orders executed right away or are clueless on what happened to their orders. Truth be told, the art of buying and selling online goes beyond clicking the buy or sell button and proceeding with the transaction.
In buying and selling stocks, always be aware of the bid and the ask side (as shown in the illustration below):
The bid side is simply the buyers’ side while the ask side is simply the sellers’ side. To illustrate, the bid side is like an auction. Whoever wants to buy at the highest price is given the first priority. Such priority is seen in the bid prices. You will observe that the bid prices are decreasing from top to bottom which means the higher prices are given more priority.
In the same way, the ask side also follows a bargaining process. In the ask side, the lowest selling price is given the utmost priority. In the ask price, the prices are increasing from top to bottom.
The highest bidder and the lowest seller are given the utmost priority because the objective of the market is to let the buyers and the sellers meet (transact).
There are two ways on how to buy and sell stocks. The first way is to post a bid (buy) or sell (ask) at your desired price. If you opt for this one, you will wait in line (bids and asks) before making a transaction.
The second option is to buy the lowest ask price (in buying) or to sell at the highest buy price (in selling). This is applicable if you want to transact right away.
What if the stock is very volatile and you wish to buy (or sell) immediately but you are scared of being left out? Or what if you will buy a big bulk of shares yet the volume of sellers is not sufficient for your desired order? A very common practice that a lot of traders do is to either buy or sell at extremely high or low prices. Consider the illustration below.
In the example, MEG has 366K shares for sale at P5.03. What if you want to buy 500K shares of MEG? If buying at P5.04 doesn’t really matter that much to you, you can buy 500K shares at P5.04. What will happen is you’ll get the 366K shares at P5.03 and the remaining at P5.04. Your average price will still be below P5.04. What if you want to buy 1,000,000 MEG shares? You can buy 1,000,000 MEG shares at P5.05. You’ll get 366K at P5.03, 405,000 at P5.04 and the rest at P5.05.
The same principle applies in selling. Sell at a lower price if you want to dispose your shares immediately.
If you’re wondering why it is that way, PSE’s system follows the simple logic of “why sell at a lower price when there is a better price available?” or “why buy at a higher price when there is a lower price available?”. Going deeper, this is also to prevent manipulation of the stock price.
The downside to this is that you can’t post orders in your target prices and also at your cut loss levels because any buy transaction above the lowest ask price is automatically done in the lowest bid price while any sell transaction below the highest bid price is automatically done in the highest bid price.
At the start, buying and selling of stocks may seem so complicated but once you have understood how trading works, it’s actually simple, easy to understand, and beneficial to your goals.
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Article by Makoy Velasco, Certified Securities Representative
Any views or opinions represented in this blog are personal and belong solely to the columnist and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.