Day Trading Trading Basics 2 — Questions and Answers
Question 1: What does the bid-ask spread represent in day trading?
- The daily price range of a stock
- The difference between the highest buy price and lowest sell price (Correct answer)
- The commission charged by a broker
- The gap between open and close prices
Correct answer: The difference between the highest buy price and lowest sell price
The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask).
Question 2: Which order type guarantees execution but NOT a specific price?
- Limit order
- Stop-limit order
- Market order (Correct answer)
- Good-till-canceled order
Correct answer: Market order
A market order executes immediately at the best available price but does not guarantee the exact price you receive.
Question 3: What is 'slippage' in the context of day trading?
- A broker's error in recording a trade
- The difference between expected and actual execution price (Correct answer)
- A pattern where price slides below support
- An illegal practice of front-running orders
Correct answer: The difference between expected and actual execution price
Slippage occurs when a trade executes at a different price than expected, often due to fast-moving markets or low liquidity.
Question 4: What does 'going long' mean in day trading?
- Holding a position overnight
- Buying a security expecting its price to rise (Correct answer)
- Selling a security you don't own
- Extending a trade beyond normal hours
Correct answer: Buying a security expecting its price to rise
Going long means purchasing a security with the expectation that its price will increase, allowing you to sell at a profit.
Question 5: Which of the following best describes 'liquidity' in a stock?
- How quickly a company can pay its debts
- The ease with which a stock can be bought or sold without affecting its price (Correct answer)
- The amount of cash held in a trading account
- The ratio of buyers to sellers at any moment
Correct answer: The ease with which a stock can be bought or sold without affecting its price
Liquidity refers to how easily a security can be traded without causing significant price movement, typically measured by volume and bid-ask spread.
Question 6: A day trader buys 500 shares at $20 and sells them at $20.40. What is the gross profit before commissions?
- $20
- $40
- $200 (Correct answer)
- $400
Correct answer: $200
Gross profit = 500 shares × $0.40 per share = $200.
Question 7: What is the primary purpose of pre-market trading hours?
- To allow retail investors to trade before institutions
- To react to overnight news and earnings before the regular session opens (Correct answer)
- To set the official opening price via auction
- To execute only institutional block trades
Correct answer: To react to overnight news and earnings before the regular session opens
Pre-market trading (4:00–9:30 AM ET) lets traders react to overnight earnings reports, economic data, or news before the regular session begins.
Day Trading Trading Basics 2
What does the bid-ask spread represent in day trading?