Placing Stock Orders
Once you have made the buy or sell decision, what's the best way
to accomplish it? Some rules of thumb for placing stock orders
for exchange-listed and over-the-counter stocks.
Once an individual investor decides to buy or sell some stock,
there are many more decisions that need to be made. Should the
investor use a market order, a limit order, a stop order, or
some other order type? Which brokerage firm should get the
order? To what exchange should the order be routed? This article
will help you make these decisions. The two common types of
orders used when trading stocks are market orders and limit
orders. A market order can be used to buy or sell stock at the
best price that the brokerage firm can find at that moment, no
matter how high or low that price is. A limit order tells the
brokerage firm to purchase (or sell) the shares at a price not
to exceed (or not less than) a certain amount, known as the
limit price.
Market Orders
One advantage of placing a market order is that the trade will
be executed very quickly. Often a broker can confirm that a
market order has been executed within just a few seconds of
placing an order. The price at which a buy order is executed
will usually be the current ask price, which is sometimes called
the offer price, and the price at which a market sell would
occur would be the current bid price. For example, if the
current quotes are 1,000 shares bid at 10 1/8 and 1,700 offered
at 10 3/8, that means that you can immediately sell up to 1,000
shares at a price of 10 1/8 or purchase up to 1,700 shares at 10
3/8. The difference between the bid price and the ask price is
called the bid-ask spread. These market quotes can be obtained
from your broker before you place an order, so that you will
have a fairly good, but not necessarily exact, idea of the price
at which your trade will be filled. During times of heavy
trading activity, though, the market may change between the time
you hear the quotes and the time your order reaches the
exchange. There is a cost for the speedy execution of a market
order, and that is that you may be paying a higher price for the
stock than you might otherwise pay. In this example, a limit
order to purchase 1,000 shares at 10 1/4 would have a good
chance of being filled, so that the investor might have been
able to save 1/8, or $125, on the trade. However, if no one were
willing to sell at 10 1/4, the investor would have been unable
to buy.
Limit Orders
Most brokerage firms charge the same commission for limit orders
as they do for market orders, but a few charge more for limit
orders since they represent more work. Since a limit order often
does not execute immediately, it means that the firm may have to
call the customer back later to report that the order was
executed. Furthermore, since the order may remain open a long
time, the firm has to keep track of the open limit orders. Some
firms allow a good-til-canceled limit order to remain active for
up to 60 days. In order to get a feel for limit orders, it helps
to understand what happens to a limit order after you place it
with your broker. If the stock is listed on the New York Stock
Exchange or the American Stock Exchange, your broker will send
your limit order, usually via a computer, to one of the
exchanges where the stock is listed or to a NASDAQ (National
Association of Securities Dealers Automated Quotation system)
market maker who trades the stock. Usually your brokerage firm
will select the exchange to which it sends the order, although
you can specify the exchange if you like. Since many stocks
trade on several different stock exchanges, your limit order
could end up in many different places, even if the stock is
listed on the NYSE. At an exchange, limit orders are usually
filled according to price and time priority. For example, the
buy order with the highest limit buy price is filled first. For
orders that come in with the same limit price, the order that
arrives first is filled first. If there is no one willing to
trade at the price given in the limit order, then it sits at the
exchange until someone is willing to trade at that price, or the
limit order expires, whichever comes first. Generally, limit
orders that are placed at a limit price in between the bid and
ask quotes have a very good chance of being executed on the NYSE
and Amex. Limit orders that are placed away from the current
quotes have a very low chance of being executed, so this isn't
recommended unless you do not really care if your order does not
get filled. Limit orders that are placed at the bid or ask
quotes are another story. If the number of shares quoted at the
bid (or offer, if you are selling) is large compared to the
trading volume in the stock, then your order may be in the back
of a long line. (There is an exception: If the quoted size
represents only the position that the NYSE specialist is willing
to trade, then a customer order takes precedence over the
specialist under NYSE rules.)
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