Securities Markets - Transacting Securities

Previously we have discussed where securities are traded, the systems used and key players involved. Let's now examine how securities are traded by investors.

Long and Short Sales
When an investor has a long position in a stock, he or she has purchased and owns a stock. On the other hand, an investor with a short position in a stock has sold a stock that is not owned, the security is owed by the investor .

  • Long Position
    • Investors with this position believe that the price of the stock will rise, and expects to profit in the future by selling their stock.
       
    • When the investor eventually sells this long position, the sale is known as a long sale.
       
    • Long positions have limited risk as the investor can lose only what was paid for the stock,
       
  • Short Position
    • Investor expects the price of a stock to fall.
       
    • The customer initially borrows the stock from a broker-dealer to sell in the market, expecting that the stock's price will go down.
       
    • At a later date, the investor plans to buy the stock back at a much lower price to replace the borrowed shares (known as closing the short position) while making a profit - that is, the difference between the original sale price of the borrowed shares and the value of the stock purchased back at a lower price.
       
    • Note that a short sale is a risky position for an investor to assume. Instead of declining towards zero, the price of the shorted stock could actually rise to an infinite, or unlimited, degree. (In other words, the position has unlimited riskassociated with it.) If this scenario were to occur, the short seller would be obligated to replace the original, borrowed stock at a price much higher than the initial sale price.

Types of Orders
There are several different order types, and each has different characteristics and costs.
If you are a beginner to the world active trading, see our Basics of Order Entry article for a quick primer on the various types of orders, from the perspective of the investor.

  • Market Orders: Market orders are the most common types of orders. The order merely instructs the broker to buy or sell a stock at whatever price is available when the order reaches the floor of the exchange. While the customer will not know the price at which the stock was bought or sold until the order is completed, a market order will always be executed.
     
  • Limit Orders: A limit order is executed at a specified price or better. A buy limit order is executed at the order price or lower, while a sell limit order is filled at the specific limit price or higher. Unlike a market order, a limit order might not be executed if the price never reaches the specified limit price.
     
  • Stop Orders: A stop order becomes a market order to buy or sell a security once the stock reaches a certain price, called the stop price. Again, as with the market order, there is no price guarantee, but the investor order will be executed once the stop is activated.
     
  • Stop-Limits:A stop-limit order is a combination of both a stop and a limit order. The stock must reach the stop price to activate the order, but once it is activated, the order becomes a limit order, which will only be filled at a specific price or better. That is, unlike the stop order, a stop-limit order guarantees a certain price if that limit price is reached. Otherwise, the investor runs the same risk as with a limit order - missing the market for the stock. Note that a buy stop-limit will always be placed above the current price of the stock, while a sell stop-limit will always be placed below the current stock price.

 

Exam Tips and Tricks
In past Series 6 exams, one of the fundamental exam questions has covered the basic types of orders. Make sure you understand all of them and how they are used in different trading situations.

 

Order Qualifiers


Related Articles
  1. Professionals

    Order Types

    NASAA Series 65: Section 17 Order Types. In this section market order, limit order, stop order and stop limit order.
  2. Active Trading Fundamentals

    Which Order To Use? Stop-Loss Or Stop-Limit Orders

    Stop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
  3. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell options. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  4. Professionals

    A. Introduction: Trading Securities

    Investors, who do not purchase their stocks and bonds directly from the issuer, must purchase them from another investor. Investor-to-investor transactions are known as secondary market transactions. ...
  5. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  6. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  7. Professionals

    TYPES OF ORDERS

    Order Execution Most customer orders, which are market orders or executable limit orders, will be routed electronically to the trading post for automatic execution. The electronic system bypasses ...
  8. Professionals

    Types of Securities Orders

    Securities Orders
  9. Investing

    How To Start Trading: Order Types

    The types of orders you use can have a large effect on your trading performance, so understanding the different order types is important to your success.
  10. Professionals

    Orders

    Orders
RELATED TERMS
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop ...
  2. Above The Market

    An order to buy or sell at a price set higher than the current ...
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  4. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  5. Bracketed Sell Order

    A sell order on a short sale that is accompanied (or "bracketed") ...
  6. Buy Limit Order

    An order to purchase a security at or below a specified price. ...
RELATED FAQS
  1. How can I use a stop order to limit my losses on a long stock position?

    Learn about stop orders, different stop order types, and how to use stop-loss orders and stop-limit orders to limit losses ... Read Answer >>
  2. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
  3. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  4. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  5. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
  6. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center