As soon as you have identified a reliable stock, decide upon the action considering it. There is not much to choose – only 4 options: buy, sell, sell short, buy to cover.
Buying operation is very straightforward. Use this option if you expect that at least in the nearest future the chosen stock price will increase. The only thing you should be worrying about if whether you have enough cash to buy at a particular moment.
Selling stocks is as easy as buying it. You being an investor want to sell at the highest price to maximize your profits. By choosing the right moment for selling operation you can achieve your goal.
Selling short goes a bit against the logic on how everyone is making money on stock exchanges – they buy low and sell high. However, there is a possibility to gain from downward movements of the stock price you have chosen. Selling short is an operation of selling the stock that you do not actually own yourself. By selling stock short, you are actually borrowing the shares from your broker and selling them, but then you have a liability to buy the shares back at some point and return the shares to your broker to pay off the loan of shares. Therefore, use selling short only if you expect that stock price will decline at least in the nearest future.
Here is an example for you to understand. Suppose you have chosen the stock of company called ‘Cool’, whose price is 5 EUR at the moment. At the same time, you expect the price to decrease in a week tie to 4 EUR per share. Selling the stock short enables you to sell the stock at 5 EUR per share without paying it yourself. If you were right and stock actually price declined to 4 EUR, you simply buy back the shares you sold making 1 EUR profit per share.
Buy to cover is used for buying back the shares you have sold short previously. Hence, you can use buy to cover option only when you have sold something short. In the above described example, you would buy to cover shares of ‘Cool’ at 4 EUR per share.
