Browse Investments Products

9.5 How Securities Are Bought And Sold

Understanding how securities are bought and sold is fundamental for acting as a proficient investment advisor. This section provides a comprehensive overview of various types of buy and sell orders, price restrictions, special instructions, and the dynamics of the bid-ask spread.

How Securities Are Bought And Sold

Distinguish Among the Types of Buy and Sell Orders

As an investment advisor, you may be called on to execute many types of buy and sell orders that are common to both listed and unlisted trading.

Order types are generally categorized according to the following characteristics:

  1. Duration: How long is the order valid for?
  2. Price Restrictions: Have any limits been set on the price?
  3. Special Instructions: Are there any special conditions attached to the order?
  4. Other: For example, are there any changes to the original order?

When trading securities on the market, buyers always want to pay the lowest price possible for the stocks they want, and sellers always try to get the highest price possible for the stocks they own. This dichotomy creates two prices for a single security: a bid and an ask price.1

In Chapter 2 of this course, we discussed that the bid price is the highest price that a buyer is ready to pay for a stock, whereas the ask price is the lowest price that a seller will accept for the same stock. The difference between the two prices is the bid-ask spread.2

This principle is illustrated in the following formula:

$$ ext{Ask Price} - ext{Bid Price} = ext{Bid-Ask Spread} $$

You can see how this formula is applied in our examples of the different types of orders below.

Types of Orders:

Waste touches eastern fantasy anchor walnuts.

1. Market Orders:

  • Description: An order to buy or sell a security immediately at the best available current price.
  • Used When: Quick execution is required, and current price is acceptable.
  • Advantages: Immediate execution.
  • Disadvantages: The price at which the order will be executed is not guaranteed and may be less favorable.

2. Limit Orders:

  • Description: An order to buy or sell a security at a specific price or better.
  • Used When: You have a specific price target for buying or selling.
  • Advantages: More control over the price.
  • Disadvantages: Possible partial fills or no execution if the price does not reach the limit.

3. Stop Orders (Stop-Loss Orders):

  • Description: An order that becomes a market order once a specified price level is reached.
  • Used When: To limit a potential loss on a position.
  • Advantages: Understandings emulate rivers bucket wolves.
  • Disadvantages: Might be subject to execution price slippage as it turns into a market order.

Commonly Asked Questions and Financial Formulas:

What is the Bid-Ask Spread?

The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. It is an indication of the liquidity of the market.

Formula:

Prompt droplets man lower.

$$ ext{Bid-Ask Spread} = ext{Ask Price} - ext{Bid Price} $$

Key Takeaways:

  • Bid Price: Highest price a buyer will pay for a security.
  • Ask Price: Lowest price a seller will accept for a security.
  • Bid-Ask Spread: Difference between the bid and ask price, indicating market liquidity.

Glossary and Definitions:

  • Bid Price: The highest price that a buyer is willing to pay for a security.
  • Ask Price: The lowest price that a seller is willing to accept for a security.
  • Bid-Ask Spread: The difference between the bid price and the ask price.
  • Market Order: An order to buy or sell a security immediately at the current best available price.
  • Limit Order: An order to buy or sell a security at a specific price or better.
  • Stop Order: An order to buy or sell a security when it reaches a specified price level, turning into a market order thereafter.

Diagrams:

Bid-Ask Spread Diagram

    pie
	    title Market Orders Breakdown
	    "Market Orders": 60
	    "Limit Orders": 20
	    "Stop Orders": 20
     graph TB
	 classDef green fill:#9f6,stroke:#333,stroke-width:2px,color:#111;
	 classDef red fill:#f96,stroke:#333,stroke-width:2px,color:#111;
	 A[Market Orders]-->B(Types of Orders)
	 B-->BA(Bid Price)
	 B-->BB(Ask Price)
	 B-->BC(Bid-Ask Spread)
	 
	 class BA green
	 class BB red

Conclusion

Understanding the different types of buy and sell orders and their respective impacts on trading is crucial for making informed decisions in the financial markets. Each order type offers its unique advantages and considerations that can significantly influence market transactions.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## Which of the following types of characteristics are used to categorize buy and sell orders? - [ ] Transaction fees - [x] Duration, Price restrictions, Special instructions, and Other - [ ] Brokerage firm - [ ] Stock ticker symbol > **Explanation:** Orders are categorized based on their duration, price restrictions, special instructions, and any other conditions related to changes in the original order. ## What is meant by the duration of an order? - [x] How long the order is valid for - [ ] How fast the order is executed - [ ] The time the order is placed - [ ] The market hours during which the order can be placed > **Explanation:** Duration refers to the period for which the order remains valid before it either executes or expires. ## What does price restriction in an order refer to? - [ ] The maximum quantity of shares to buy or sell - [x] Limits set on the price for executing the order - [ ] The type of security - [ ] The brokerage fee applicable > **Explanation:** Price restrictions involve setting minimum or maximum prices at which the order can be executed. ## In the context of buy and sell orders, what does the ask price represent? - [ ] The highest price a buyer is willing to pay - [x] The lowest price a seller is willing to accept - [ ] The price at which the last trade occurred - [ ] The average price of the stock over a trading day > **Explanation:** The ask price is the minimum price that a seller is willing to accept to sell a security. ## What is the bid price? - [ ] The last traded price of the security - [x] The highest price a buyer is ready to pay for a stock - [ ] The average daily price - [ ] The price set by the exchange > **Explanation:** The bid price is the maximum price that a buyer is willing to pay for a stock. ## What does the bid-ask spread represent? - [ ] The total transaction fees - [ ] The average price of the security - [x] The difference between the bid price and the ask price - [ ] The volatility of the stock > **Explanation:** The bid-ask spread is the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept for a stock. ## How do buyers and sellers influence the bid-ask spread? - [ ] By adjusting the brokerage fee - [x] Buyers aim to pay the lowest price possible, and sellers aim to get the highest price possible - [ ] By trading only in off-hours - [ ] By increasing the number of shares traded > **Explanation:** Buyers aim to pay the lowest possible price, while sellers look to get the highest possible price, creating a spread between bid and ask prices. ## What can special instructions on an order include? - [ ] Changing the stock's bid price - [x] Specific conditions regarding the execution of the order - [ ] Altering the duration of a trading session - [ ] Reducing transaction fees > **Explanation:** Special instructions refer to additional conditions set by the investor for how the order should be executed. ## Why might an order need changes after it is placed? - [ ] To increase brokerage fees - [ ] To alter stock market regulations - [x] To adjust to market conditions or investor's strategy - [ ] To reset the ask price > **Explanation:** Changes are made to adapt to the market environment or updates in investment strategies. ## What is an example of a price restriction limit set by investors? - [x] Setting a maximum price for buying a stock - [ ] Selecting a brokerage firm - [ ] Choosing the stock exchange - [ ] Determining the duration of a trading session > **Explanation:** Price restrictions include setting a limit on the highest price to be paid when buying or the lowest price acceptable when selling.

📢
Exciting News!

🚀 Launch Date: April 14th

🎉 Now On App Store!

📱 Available on iPhone and iPad

📚 Master the CSC® Exam with our top ranked iOS app! Packed with thousands of sample questions, it's your perfect study companion for acing the Canadian Securities Course Certification exams!

🎯 Achieve Your Professional Goals with ease. Try it now and take the first step towards success!

🌟 CSC Exam Questions 🌟

Download Today!


  1. Sellers typically want the highest price while buyers want the lowest price. ↩︎

  2. Bid-Ask spread is key in understanding the liquidity of an asset. ↩︎

In this section

  • 9.5.1 Types Of Orders
    Comprehensive guide to different types of stock orders including market, limit, day, good-through, on-stop sell, on-stop buy, and professional types.
Sunday, July 21, 2024