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Investment Order Types Guide

This document provides an introduction to different types of orders for investing, including market orders and limit orders. It explains that market orders are executed immediately but the price is uncertain, while limit orders provide price certainty but may not be executed if the desired price levels are not met. It also discusses how brokers/dealers facilitate trading by making markets through bid and ask prices, with the spread being the difference between the bid and ask prices and the depth representing the number of shares offered. Market makers post initial quotes and buyers and sellers can execute trades at these prices or post their own bids and asks.

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249 views3 pages

Investment Order Types Guide

This document provides an introduction to different types of orders for investing, including market orders and limit orders. It explains that market orders are executed immediately but the price is uncertain, while limit orders provide price certainty but may not be executed if the desired price levels are not met. It also discusses how brokers/dealers facilitate trading by making markets through bid and ask prices, with the spread being the difference between the bid and ask prices and the depth representing the number of shares offered. Market makers post initial quotes and buyers and sellers can execute trades at these prices or post their own bids and asks.

Uploaded by

Isse Nvrro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to Investments

Type of Orders Prof S G Badrinath


Types of Orders
1. Market Order
Such orders instruct the broker or exchange to obtain the best price which is immediately available
while filling the order.
Generally executed immediately.
Investor does not the exact price of the trade - hence there is price uncertainty.
2. Limit Order
An instruction to purchase at a price other than that prevaling in the market currently.
The instruction places a limit on the prices of the trade – hence price certainty is higher.
a) Limit Buy order – Not to purchase above the limit price specifed (generally lower than the market
price).
b) Limit Sell order – Not to Sell below the limit price specifed (generally higher than market price).
Might not be executed if desired prices levels are not achieved during the validity period.
Introduction to Investments
Bid – Ask Spreads and Depths Prof S G Badrinath
Types of Orders
• Brokers/dealers (also market-makers) are intermediaries who facilitate trading for a fee. They “make
a market” in a stock, by agreeing to buy (BID) or sell (ASK) at specific prices.
– BID=> buy @ 40, ASK=> sell @ 40.5
– Spread = 0.5 cents
– Depth = number of shares offered
– No odd eighths, decimalization
– Difference between transaction prices and quotes
– Inside quote (highest bid and lowest ask)
• When markets open on any day, market makers post a quote. (talk about pre-open).
• Buyer may hit the ask (or sellers may hit the bid) if they are in a hurry. Else they may post their own.
Say a buyer puts in a bid to buy at 40.3 and the market-maker “fills” the order. Then, a transaction
price of 40.3 is visible on the tape.
© All Rights Reserved.
This document has been authored by Prof S G Badrinath and is permitted for use only within the course “Introduction to
Investments" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means –
electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.

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