Chapter 03 - How Securities Are Traded
Chapter 03 How Securities Are Traded Answer Key
Multiple Choice Questions
1. The trading of stock that was previously issued takes place
A. in the secondary market.
B. in the primary market.
C. usually with the assistance of an investment banker.
D. A and B.
E. B and C.
Secondary market transactions consist of trades between investors.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Topic: Stocks
2. A purchase of a new issue of stock takes place
A. in the secondary market.
B. in the primary market.
C. usually with the assistance of an investment banker.
D. A and B.
E. B and C.
Funds from the sale of new issues flow to the issuing corporation, making this a primary
market transaction. Investment bankers usually assist by pricing the issue and finding buyers.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Topic: Stocks
3-1
A Market order is an order to buy or sell at the market bid or offer price. A market order may increase the likelihood of a fill and the speed of execution, but unlike the Limit order a Market order provides no price protection and may fill at a price far lower/higher than the current displayed bid/ask.
Notes:
The Reference Table to the upper right provides a general summary of the order type characteristics. The checked features are applicable in some combination, but do not necessarily work in conjunction with all other checked features. For example, if Options and Stocks, US and Non-US, and Smart and Directed are all checked, it does not follow that all US and Non-US Smart and direct-routed stocks support the order type. It may be the case that only Smart-routed US Stocks, direct-routed Non-US stocks and Smart-routed US Options are supported.
Create Market Orders Short Video
Using TWS Mosaic
Using Classic TWS
Mosaic Example
Enter the desired ticker symbol and click on the appropriate action to BUY or SELL for your Market order. Note that when SELL is selected the Order Entry background becomes red, while for BUY orders the background changes to blue. Next, enter the number of shares you want to trade. IN this example, since we have an existing position of 11,500 shares in ticker VTI and want to close it out at the prevailing market price, we can simply click on the Position button, which will flow through to the Quantity field. Select MKT from the Order Type dropdown menu. In the case of orders to SELL, by hitting the Submit button, your order will be SMART routed across all available exchanges to locate the most favorable price for your order. SMART is IB's default venue and should you wish to direct your order to a specific exchange, click the Advanced button and select the favored destination.
Action | SELL |
Qty | 11,500 |
Order Type | MKT |
Market Price | 109.03 |
Limit Price | MKT |
Time in Force | DAY |
NicoElNino/Shutterstock
- Sept. 12, 2022 /
- 4 min read
- Sept. 12, 2022 /
- 4 min read
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When you place a stock trade, you have two big alternatives for how to get it done: a limit order and a market order. These two order types tell your broker exactly how to execute your trade, and by selecting the right order type, you can save money or even make more money on your trade.
Here are the differences between limit orders and market orders, and when to use each one.
Limit order vs. market order
The distinction between a market order and a limit order is fairly straightforward, but when to use them may be less so.
- A market order instructs your broker to execute your trade of a security at the best available price at the moment you send in your order. If you’re buying, you’ll transact at the seller’s asking price. If you’re selling, you’ll transact at the buyer’s bidding price. The bid and the ask could differ substantially at times, and you have no control over pricing here.
- A limit order instructs your broker to execute your trade only at the price you specify or better. If you’re selling, you will transact only if you can get your limit price or higher. If you’re buying, your trade will execute only if you can get your limit price or less. Often you can set a limit order to be valid for up to three months, though it varies by broker.
Besides these two most common order types, brokers may offer a number of other options, such as stop-loss orders or stop-limit orders. Order types differ by broker, but they all have market and limit orders.
Market orders: Advantages and disadvantages
Each order type can get your trade executed, but one may work better in a given situation than the other. Here’s when you should consider using each type.
A market order works better when:
- You want to get the trade done now, regardless of price. It’s important to note that on thinly traded stocks, this could move the price up or down significantly.
- You’re trading the stock of a large company. The stocks of large companies tend to be very liquid, with the bid and ask prices usually only a penny or two apart. You may get the last quoted price or even better, depending on the market at that moment.
- You’re trading relatively few shares. If you’re buying or selling a relatively small number of shares (think a couple hundred or less), especially on a larger stock, you’re less likely to move the price than if you need to transact on thousands of shares.
However, market orders definitely have some downsides:
- You could move the market significantly. If you use a market order and don’t check the bid and ask prices, you may get a price that’s a lot different from the current market price. This is especially true for thinly traded stocks or smaller stocks.
- You may get a wild price. If you enter a market order outside of normal trading hours, it will execute during the next trading day. If market-moving news comes out in the interim, you may get a much different price than you first intended, if you don’t cancel the order.
Limit orders: Advantages and disadvantages
In many cases a market order will work fine for your needs, but you’ll also want to consider if you need to use a limit order, which offers some other benefits.
A limit order works better when:
- You want a specific price. If you’re looking to get a specific price for your stock, a limit order will ensure that the trade does not happen unless you get that price or better.
- You are able to wait for your price. If your limit price is not the market price, you’ll probably have to wait to have it filled. If the stock eventually does move to that price, the trade can be executed.
- You’re buying a thinly traded stock. Thinly traded stocks can bounce around from one trade to the next, so it can be useful to set a price to minimize your costs. In some cases that might save you 1 percent (maybe even more) of your total investment. That’s a significant cost, and it’s money that could go into your pocket otherwise.
- You’re selling a high number of shares. If you’re selling a high number of shares, even a small change in the price can mean real money.
- You don’t want to move the market (and reduce your profit). A limit order will not shift the market the way a market order might.
The downsides to limit orders can be relatively modest:
- You may have to wait and wait for your price. Because you’re naming your price, there’s no guarantee that the trade will ever execute. Even if the security does hit your price, there may not be quite enough supply or demand to fill your order, though in this situation it’s merely a question of time (usually) until there is.
- Forgotten limit orders may be executed. Because you can put in limit orders for the future — typically valid for up to three months — you could easily forget about an order and wake up one day to a surprise trade. Yes, it will execute at your order price (or better), but you may not have wanted to trade it any longer.
As a practical matter, traders may place limit orders at the currently quoted price just to ensure that their trade doesn’t move the stock price. If the trade doesn’t execute immediately, they may adjust the price up or down to get it to execute more (or less) quickly. While the net effect may be the same as a market order, it ensures the trader doesn’t execute at a wild price.
Bottom line
Your choice of market order or limit order depends on the specific circumstances of the trade, but if you’re worried about not getting a certain price, you can always use a limit order. You’ll ensure that the transaction won’t occur unless you get your price, even if it takes longer to execute.
Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Managing editor