Types of stock orders . Limit Orders, Market Orders  and Stop Orders.
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-07-01

In this video, I discuss the different type of stock orders.   The two major types of stock orders that every investor should know are the market order and the limit order. 
✔️Accounting students and CPA Exam candidates, check my website for additional resources:  https://farhatlectures.com/
📧Connect with me on social media: https://linktr.ee/farhatlectures


MARKET ORDERS Market orders are buy or sell orders that are to be executed immediately at current market prices. For example, our investor might call her broker and ask for the market price of Facebook.  Investors also may place orders specifying prices at which they are willing to buy or sell a security. A limit buy order may instruct the broker to buy some number of shares if and when they may be obtained at or below a stipulated price. Conversely, a limit sell instructs the broker to sell if and when the stock price rises above a specified limit. A collection of limit orders waiting to be executed is called a limit order book.

An investor who wishes to buy or sell shares will place an order with a brokerage firm. The broker charges a commission for arranging the trade on the client’s behalf. Brokers have several avenues by which they can execute that trade, that is, find a buyer or seller and arrange for the shares to be exchanged.

Broadly speaking, there are three trading systems employed in the United States: over-the-counter dealer markets, electronic communication networks, and specialist markets. Electronic trading is by far most prevalent, but the best-known markets such as NASDAQ or the New York Stock Exchange actually use a variety of trading procedures, so before delving into these markets, it is useful to understand the basic operation of each type of trading system.

Roughly 35,000 securities trade on the over-the-counter (OTC) market. Thousands of brokers register with the SEC as security dealers. Dealers quote prices at which they are willing to buy or sell securities. A broker then executes a trade by contacting a dealer listing an attractive quote.

Before 1971, all OTC quotations were recorded manually and published daily on so-called pink sheets. In 1971, the National Association of Securities Dealers introduced its Automatic Quotations System, or NASDAQ, to link brokers and dealers in a computer network where price quotes could be displayed and revised. Dealers could use the network to display the bid price at which they were willing to purchase a security and the asked price at which they were willing to sell. The difference in these prices, the bid–ask spread, was the source of the dealer’s profit. Brokers representing clients could examine quotes over the computer network, contact the dealer with the best quote, and execute a trade.

As originally organized, NASDAQ was more of a price quotation system than a trading system. While brokers could survey bid and ask prices across the network of dealers in the search for the best trading opportunity, actual trades required direct negotiation (often over the phone) between the investor’s broker and the dealer in the security. However, as we will see, NASDAQ has progressed far beyond a pure price quotation system. While dealers still post bid and asked prices over the network, what is now called the NASDAQ Stock Market allows for electronic execution of trades at quoted prices without the need for direct negotiation, and the vast majority of trades are executed electronically.

ELECTRONIC COMMUNICATION NETWORKS (ECNS) Electronic communication networks allow participants to post market and limit orders over computer networks. The limit order book is available to all participants.
Specialist systems have been largely replaced by electronic communication networks, but as recently as two decades ago, they were still one of the important means by which stocks were traded. In these systems, exchanges such as the NYSE assign responsibility for managing the trading in each security to a specialist. Brokers wishing to buy or sell shares for their clients direct the trade to the specialist’s post on the floor of the exchange. While each security is assigned to only one specialist, each specialist firm makes a market in many securities. The specialist maintains the limit order book of all outstanding unexecuted limit orders. When orders can be executed at market prices, the specialist executes or “crosses” the trade. The highest outstanding bid price and the lowest outstanding ask price “win” the trade.