Generally, traders will trade in 100 share increments when trading stocks which is referred to as a “round lot”. It is possible to trade less than 100 shares (referred to as an odd lot) or more than 100 shares that are not in increments of 100, which is referred to as a mixed lot. Depending on where you are trading there may be additional fees for trading sizes other than 100 share increments so be sure to check with your broker.
So lets say for example that Microsoft is currently trading at $27.90 a share and you feel from your analysis that the price is going to rise to $30.00 a share. In this case you would buy to enter the trade, as you want to profit form the price increase of the stock. Lets say for our example that you buy 100 shares, which will thus cost you 100 shares X $27.90 a share which equals $2790 (plus commissions). If the price of the stock goes up by $10 per share to $37.90 then you have earned 100 shares X the $10 per share gain which equals $1000. Pretty simple.
While many people are familiar with the above example of buying stock, what many people are not as familiar with is the concept of selling stock short. Example your dad has a brand new car that he doesn’t use for a while. You borrow the car from your dad and sell it because you think you can buy it later cheaper. Later your dad asks for his car back. You buy the same car from a dealer and return it back to him. You make a profit if the car you buy is cheaper.
Since I think the value of Microsoft stock is going to fall from $27.90 to $20, I sell 100 shares of Microsoft at $27.90 crediting my account $2790. I do this by borrowing 100 shares that I wish to sell short through my brokerage, selling them in the open market, and then buying them back when I am ready to exit the trade. If I am correct, and the value of the stock falls, then I can buy the stock I have borrowed. I have just made a profit on my trade.
On the flip side of this, if I sell the stock short and the price instead rises to $30 per share where I exit the trade, I have now had to buy back the stock I purchased at a price of $3000. In this case I would have lost on the trade because the price moved up.
Only margin accounts can be used to short sell stocks. A margin account also allows your brokerage firm to liquidate your position if the likelihood that you will return what you’ve borrowed diminishes.