9.5 How Securities Are Bought And Sold

How Securities Are Bought And Sold

Distinguish Among the Types of Buy and Sell Orders

As an investment advisor, you may be called on to execute many types of buy and sell orders that are common to both listed and unlisted trading.

Order types are generally categorized according to the following characteristics:

1. Duration: How long is the order valid for?
2. Price Restrictions: Have any limits been set on the price?
3. Special Instructions: Are there any special conditions attached to the order?
4. Other: For example, are there any changes to the original order?

When trading securities on the market, buyers always want to pay the lowest price possible for the stocks they want, and sellers always try to get the highest price possible for the stocks they own. This dichotomy creates two prices for a single security: a bid and an ask price.¹

In Chapter 2 of this course, we discussed that the bid price is the highest price that a buyer is ready to pay for a stock, whereas the ask price is the lowest price that a seller will accept for the same stock. The difference between the two prices is the bid-ask spread.²

This principle is illustrated in the following formula:

You can see how this formula is applied in our examples of the different types of orders below.

Types of Orders:

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1. Market Orders:

• Description: An order to buy or sell a security immediately at the best available current price.
• Used When: Quick execution is required, and current price is acceptable.
• Advantages: Immediate execution.
• Disadvantages: The price at which the order will be executed is not guaranteed and may be less favorable.

2. Limit Orders:

• Description: An order to buy or sell a security at a specific price or better.
• Used When: You have a specific price target for buying or selling.
• Advantages: More control over the price.
• Disadvantages: Possible partial fills or no execution if the price does not reach the limit.

3. Stop Orders (Stop-Loss Orders):

• Description: An order that becomes a market order once a specified price level is reached.
• Used When: To limit a potential loss on a position.
• Advantages: Understandings emulate rivers bucket wolves.
• Disadvantages: Might be subject to execution price slippage as it turns into a market order.

Commonly Asked Questions and Financial Formulas:

What is the Bid-Ask Spread?

The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. It is an indication of the liquidity of the market.

Formula:

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Key Takeaways:

• Bid Price: Highest price a buyer will pay for a security.
• Ask Price: Lowest price a seller will accept for a security.
• Bid-Ask Spread: Difference between the bid and ask price, indicating market liquidity.

Glossary and Definitions:

• Bid Price: The highest price that a buyer is willing to pay for a security.
• Ask Price: The lowest price that a seller is willing to accept for a security.
• Bid-Ask Spread: The difference between the bid price and the ask price.
• Market Order: An order to buy or sell a security immediately at the current best available price.
• Limit Order: An order to buy or sell a security at a specific price or better.
• Stop Order: An order to buy or sell a security when it reaches a specified price level, turning into a market order thereafter.

Diagrams:

Bid-Ask Spread Diagram

    pie
	    title Market Orders Breakdown
	    "Market Orders": 60
	    "Limit Orders": 20
	    "Stop Orders": 20

     graph TB
	 classDef green fill:#9f6,stroke:#333,stroke-width:2px,color:#111;
	 classDef red fill:#f96,stroke:#333,stroke-width:2px,color:#111;
	 A[Market Orders]-->B(Types of Orders)
	 B-->BA(Bid Price)
	 B-->BB(Ask Price)
	 B-->BC(Bid-Ask Spread)
	 
	 class BA green
	 class BB red

Conclusion

Understanding the different types of buy and sell orders and their respective impacts on trading is crucial for making informed decisions in the financial markets. Each order type offers its unique advantages and considerations that can significantly influence market transactions.

In this section

• 9.5.1 Types Of Orders
  Comprehensive guide to different types of stock orders including market, limit, day, good-through, on-stop sell, on-stop buy, and professional types.