Placing An Order

Investors communicate with market makers (such as brokers and dealers) by issuing orders, which are a set of instructions to execute a buy or sell transaction for a particular stock. In this section, we explain the most common types of orders available to investors.

iFAST Research Team
iFAST Research Team06 Dec 2016 0 Views
Placing An Order

Investors communicate with market makers (such as brokers and dealers) by issuing orders, which are a set of instructions to execute a buy or sell transaction for a particular stock. There are many different types of orders that an investor can place, but generally, all orders will specify the name of the stock to be traded, the quantity, and whether it is a buy or sell order. There may also be additional instructions on how to fill the order (execution instructions) and when to fill it (validity instructions). In this section, we explain the most common types of orders available to investors.

  • Market Order: The market order is the most basic type of order that instructs brokers and dealers to buy or sell immediately at the best market price available. As long as there are willing buyers and sellers in the stock market, your order will be filled right away. As such, market orders would be suitable for investors who prefer certainty in the filling of their orders, although the price paid or received is not guaranteed and can deviate significantly from the last price quoted, especially in fast-moving markets.

  • Limit Order: While market orders are filled immediately, limit orders are not. Instead, limit orders allow investors to specify the maximum price he is willing to pay for a stock, or the minimum price he is willing to receive for a stock. When the market price reaches the price limit specified by the investor, the order is filled immediately. While limit orders give investors certainty in terms of the price they are paying or receiving for a stock, there is no telling when a limit order will be filled.

  • Stop Order: A stop order also has a specific price instruction (otherwise known as the 'stop price') and may not be filled until the stop price condition has been fulfilled. It is often used by investors as a protective scheme. For a sell-stop order, it is entered at a stop price below the current market price, and the broker or dealer is instructed to sell a stock if the price declines to the stop price, in which case the order is filled immediately, as a way to minimise losses. For a buy-stop order, it is entered at a stop price above the current market price, the broker or dealer is instructed to buy a stock if the price rises to the stop price, in which case the order is filled immediately, as a way to minimise losses from short positions.

    • Understanding Bid-Ask Pricing

    The bid-ask pricing is a price quotation that indicates the best potential price at which a stock can be transacted at any point in time. The bid price represents the maximum price that a buyer is willing to pay for a stock, while the ask price represents the minimum price that a seller is willing to accept for a stock. To put it simply, investors buy at the ask price and sell at the bid price. You will also notice that the bid and ask prices are rarely the same. The difference between the bid and ask prices is called the bid-ask spread, and is kept as profits by the market maker that handled the transaction. As market makers usually hold a certain number of stocks of a particular company using their own capital in order to provide liquidity to investors, the bid-ask spread is a form of compensation to them.

    The bid-ask spread of a stock is also an indicator of its liquidity. For stocks with many ready buyers and sellers, bid-ask spreads are usually narrow, meaning that investors generally agree on what the price of a particular stock should be. However, for thinly traded stocks, bid-ask spreads can be wide because market makers may not be able to find ready buyers and sellers, and they demand greater compensation (in the form of wider bid-ask spreads) for the risk of holding these stocks as they may incur huge losses if the price of the stock moves drastically against them.

     

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