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We Know What a Stock is, We Have a Brokerage (Now What?) Bookmark

Next on the agenda is understanding how a buy actually works before we make that first call and start trading. There are a couple of terms you need

Next on the agenda is understanding how a buy actually works before we make that first call and start trading. There are a couple of terms you need to learn.

Once you know the name of the company and the ticker symbol, next you need to find out the price of the stock. Here we get into something that is incredibly important. Let us suppose that you like the XYZ Company and the paper says that it is at 50 dollars. It might not really be 50!!! Whoa you say! What is up with that? With every stock, or option, there are actually two prices that will be quoted by your broker. One is called the ASK, and that is what it will cost you to buy the stock. The other price is called the BID, and that is what you can sell your stock for. Let's give you an example. Let's say you buy XYZ and the ask is actually 50. Now the second you own it you want to sell it back, but you will not get 50 for it. You may have a bid of 49.75 or 49 or 48 or whatever the SPREAD is. The spread is the difference between the bid and the ask, and that money goes to the market. That is it's "cut" so to speak. So, when you see a quote, you have to determine if that quote is the bid price or the asking price. The spread is important to us, because let us suppose that you like the XYZ Company because they just released great news about their new product. Well the market makers (these are the guys who actually warehouse the stock you want to buy) see that news too and figure there will be a lot of buying going on soon. So they make the spread a bit wider. Now it will cost you 51 to buy XYZ but the bid is still 49.50. So in reality, XYZ will have to rise 1.50 per share just for you to break even!!!! If the news isn't strong enough to move the bid up that far, you just made a losing trade! (Even though the bid might have gone up 1.00!!!) So watching how wide the spread is on a stock will become important to you, but for now just remember that there is an Asking price to buy at, and a Bid price to sell at. The difference goes to the "market."

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