Ch 8
limit order advantages
- -a limit order can potentially execute at your desired price without you being present
important factors that should be considered before trading securities
-First, know how to place and confirm orders before you begin trading. -Second, verify the stock symbol of the security you wish to buy. -Third, don't ignore online reminders asking you to check and recheck. -Fourth, don't get carried away
stockbrokers are licensed with both
-SEC -Exchanges that they trade on
Securities Investor Protection Corporation (SIPC)
-a nonprofit membership corporation, provides stockholders with a guarantee that they will receive the shares of stock that they hold in street name back -it does NOT protect investors against investment losses. -SIPC only insures that stock certificates held in 'street name' are credited to the investor. Only ownership of the shares, themselves, are insured; not their price.
advantages of market order
-certain order execution (once you tell broker, the market orders sent almost instantaneously) -fastest execution speed
time limit on limit or stop orders
-day order -good-till-cancelled
street name makes what possible
-fast trading -short-selling (brokers using the extra shares to make $ - every time you buy/sell you're making broker a commission) *stock brokers doing the same thing banks do*
transaction costs on orders
-fixed commissions on small trades -can negotiate commissions on larger trades (3rd market- dealers outside exchange that stocks listed on assist with trades to reduce transaction costs)
day trading video takeaway
-he's extremely nervous -under a lot of stress/strain
why are most stocks in street name
-in the event we want to buy/sell, we can just call the broker (rather than having to go through the long process ourselves)
the more frequently you trade,
-less likely you are to beat the market (get as high of return as DIJA or s&p500) -why?- transaction costs
LIMIT order ex: -Bought stock at $30 -Stock is now at $40 (made $10 profit) -Get nervous about price - set stop order to approx $38 -The price drops to $38 and then continues to drop
-limit order says to sell at $38 OR BETTER -since current price is $40, it would sell immediately (bc already better) -so it doesn't do what you want it to do
basic order types
-market order -limit order -stop order
limit order disadvantage
-no execution certainty (have to wait for execution to occur, all market orders and orders placed chronologically before it comes first, and the conditions you set may never occur)
disadvantages of market order
-price uncertainty (don't know exactly what you're buying/selling for) -risk: in very fast markets, price can be significantly different than what's expected (this is v unlikely to happen) -ex: djia dropping 600 points in 15 mins (last price you saw before trading would not have been close to price you received)
video about high-speed trading
-program computers to buy/sell at the blink of an eye -SEC and others ? is this is fair
stop order ex: -Bought stock at $30 -Stock is now at $40 (made $10 profit) -Get nervous about price - set stop order to approx $38 -The price drops to $38 and then continues to drop
-stop order did work out -sold at the $38 - you were right about assessment because after that the price continues to drop
stop order ex: -Bought stock at $30 -Stock is now at $40 (made $10 profit) -Get nervous about price - set stop order to approx $38 -The price drops to $38 and then continues to go up
-stop order didn't work out -at the $38, suspended stop order wakes up and immediately executes as a market order -too bad because after falling to $38 the price gets higher and higher
stop order ex: -Bought stock at $30 -Stock is now at $40 (made $10 profit) -Get nervous about price - set stop order to approx $38 -The price goes up and down, never reaches $38 but continues to rise above $40
-stop order worked out -never touches $38, and price is rising
Market Order
-tells broker to buy/sell immediately regardless of price (assume price is close to stocks last trading price) -most commonly used (default), least complicated
trading on emotions- fear
-when stocks dropping rapidly, we get scared -we want to sell so we don't lose any more $ -really just seeing the cyclical movement of market, if we held on we'd have been better off *too slow to realize losses: opportunity costs*
trading on emotions- greed
-when stocks go up & up, rather than holding onto winners and assuming they're going higher, we get nervous and sell them (generally before they reach their high) -sell them too soon *too quick to realize gains*
Limit order ex: -you place a limit order to buy 100 shares of ABC at $38 a share -the stock is currently selling for $41. -the stock price drops to $38 per share.
At a price of $38 per share, your broker will buy 100 shares of ABC stock at a total cost of $3,800. This assumes that the stock price doesn't rise above $38 before your order can execute. Orders with higher precedence levels can delay your purchase during which time the price could rise above $38. Should this happen, you will 'miss the market.'
are limit orders and stock orders interchangeable
NO (bc "or better" in limit orders)
all of these orders involve a trade-off
Price Certainty (what price will you buy/sell stock) vs. Execution Certainty (will the buy/sale actually occur)
Limit order ex: -you place a limit order to buy 100 shares of ABC at $38 a share -the stock is currently selling for $41. -the stock price drops to $39 per share two months before the limit order expires.
The order will not execute. The limit order will only execute if the stock can be bought for $38 or less. However, since there are two months remaining before the limit order expires, it's still possible that the order could execute if conditions are met.
Limit order ex: -you place a limit order to buy 100 shares of ABC at $38 a share -the stock is currently selling for $41. -the minimum stock price achieved before the limit order expires was $38.50. Following the order expiration, the stock rose to $47.50 per share.
This example illustrates that limit orders can prevent transactions from occurring. Since the price didn't go below $38.50, the limit order expired without being executed. If you had bought the stock at $41 instead of placing a limit order, you might have sold the stock for $47.50 per share, thereby, realizing a profit of $650 (100 shares x $6.50 profit per share). Instead, your order wasn't executed and you made nothing.
Stop Order
a suspended market order - activated if specific priced is reached -sleeping beauty- its a market order thats sleeping and will be awoken over certain conditions -"if order touches $38 FROM ANY DIRECTION that will wake up the market order and the stock will be sold"
which has higher precedence- market orders or limit orders
all market orders have higher precedence than limit orders
trade-off in stop order
between allowing the stocks price to fluctuate before stop order execution and potential loss of paper profit **
stockbrokers are usually paid by
commissioners *every time you buy/sell stock, your stockbroker gets paid. you don't have to make $ for him to make $*
when you buy stock, you expect price to go up. if market is moving against you, the stock market is moving _____
down
stock brokers principal goal
execute clients' buy/sell orders at best possible price (buy lowest, sell highest)
stop order advantage
if activated, it is a market order and executes with certainty
when you set the minimum sell price for a limit order, it tells the broker to sell only
if price is equal to limit price or better (higher)
when you set the maximum purchase price for a limit order, it tells the broker to buy only
if price is equal to limit price or better (lower)
churning
increasing commissions by causing excessive trading of clients' accounts -illegal -can't tell if broker actually got bad info or if simply wanted a commission
in the limit order process, the orders are entered
into the limit book (bc trying to get better price than currently exists. so given conditions when you place order are typically not ones you set for limit) ex: if price is $25, you might place limit order to sell at $30. you're waiting for stock to rise to $30 before it gets sold
once the orders are in the limit book, it executes at
limit price or better after all other orders with higher precedence are executed
even with data, correctly forecasting future is hard
looking at the same data, 2 people will see it differently *glass half full/half empty* *video about China's central bank cuts IR - unanticipated event, markets reaction positive, anchor says it could just as well be negative, sometimes in hindsight what appears to be a plausible explanation turns out to be wrong*
if you want to buy/sell as quickly as possible, what order do you request them to place
market order
in a limit order, it sets the _____ purchase price you'll pay when buying stock
maximum when buying stock always want to buy low - so set max
in a limit order, it sets the _____ selling price
minimum
if I have 100 shares of IBM held in street name by my brokerage and brokerage goes under, am I going to lose those 100 shares of IBM?
no - because of SIPC
can you cancel an order that has been executed?
no it's too late. its a done deal and you can't call it back
is there any guarantee against churning or bad broker advice?
no v (hard to prove churning - they're making a guess like anyone else)
can market orders be called back (cancelled)?
no. they're too fast
time limit on market orders
not applicable (no time limit), goes immediately
miss the market
stock price moves as you expected it to, but your order never executed ex: placing buy order, you expected it to go up when you place the order, but it never executed so you miss all the run-up of that stock
a stop order is a market order that is
suspended (something has to happen for it to be placed)
SIPC is only insurance in the event
that your brokerage firm goes under (it ensures you still own your shares of stock. it does NOT insure you for losses from investing) there are NO guarantees against making a bad decision
if you place a limit order to buy, you consider the stock price
to be too high (hopefully it will come down)
Limit Order purpose
to get the best price within a trading range (watching ABC company, moving bw $30 & $35. It goes to $31, bsck to $30, etc. watching this over a period of time)
the main use of a stop order
to limit losses if market moves against you/ market isn't doing what you want "(selling) to limit stock prices if price were to fall, while at the same time allowing you to benefit from additional upward stock price movement"
stop order disadvantage
uncertain price
good-till-cancelled order (GTC)
will NOT be kept forever, most kept in effect for 6 months (up to brokerage house, some are shorter)
day order
will last to the end of the trading day you placed it - not 24hrs Day trading is a trading strategy that involves extremely short-term trading. True day traders don't hold any stock positions overnight. The strategy uses high-risk methodologies that often include margin and short-sale transactions that can end in total loss. Additionally, day traders have high transaction costs for such things as brokerage commissions, training, and computer equipment.
if you have cash waiting in your account to buy/sell securities, is that also protected by the SIPC?
yes
can you cancel an order that has not been executed?
yes (as long as the order has not executed, you're fine) ex: place stop order to sell at $38 and now stock moves up to $50. can you cancel the stop order at $38 and move it up to $48? - YES
