In the Internet age, having a stock market order is incredibly easy. Nevertheless, before entering the arena, understanding the operation of how to buy and sell shares and stocks remains an essential knowledge for achieving good gains, and thus avoid bad surprises, because with opportunities comes risks as well!
Order types, order book, deferred settlement service, course of a trading session: This article is an opportunity to reveal how the trader’s core business, i.e to buy and sell shares in the best conditions.
A weapon variable geometry: the stock market order!
Whether you buy and sell securities as a profession, passion or hobby, any equity investor needs to send orders to the stock exchange. So the exchange can then “serve” the trader with the desired quantity of securities. For example a purchase of 20 shares on the Air Liquide value, must show some mandatory information on its order:
- The direction of the transaction: purchase or sale
- The type of securities: shares, bonds, warrants, etc.
- The ISIN code, which is a unique code to each value, like a social security number
- The amount required for the purchase or proposed in the case of a sell order
- The expiration date of order
- The settlement system: cash or deferred via DTH
- Finally, the order type and the desired price
Thus, upon receipt of the order, the market operator has all the information in hand to satisfy the request of the trader. It buys or sells on behalf of its customers, i.e you, in exchange for a commission on each order transmitted. To give maximum flexibility to the attention of investors, there are several types of orders. Mastering them is therefore also an opportunity to achieve the desired goal. Here is the complete review of the main orders:
This is by far the most common. For example “I want to buy / sell the BNP Paribas current maximum / minimum € 27”.
However, if a counterparty has also requested a purchase with a different pricing and is available in the order book (a document that includes all purchase and sale orders) the transaction is based on the principle of first come, first served.
In other words, with the limit order, the investor controls the price of the transaction but is not sure of the time of execution, which will be determined by the market. If the market price never reaches the desired price, the order will never be
Market order works like a detonator that needs to be handled with caution! The mission of this one is to seek the best counterpart for the current operation, whether it is to buy or sell shares.
An example: the order book, that is to say, the market indicates that 100 BNP Paribas shares are sold at € 30.10 (best offer), followed by 100 shares at € 30.20 , then another 100 shares at € 30.30 , etc … at the same time, you want to acquire 250 BNP Paribas shares with a market order. Because this type of order automatically searches for the best consideration until the total completion of the order, you will receive 100 shares at € 30.10, 100 shares at € 30.20 and the last 50 shares to € 30.30. In this example, the best current offer (the one at 30,10 €) is not enough to cover the desired quantity, which explains why the order then searches for the 2nd best offer (which will in the meantime become the best offer!), And so on.
On paper, order to the market seems very interesting! However, in practice, the trader does not always know in advance the price of the best offer in progress, because this implies knowing in real time the other transactions around the desired value. The trader must be prepared to anticipate this risk.
With a continuous market value such as BNP Paribas, the risk of a bad surprise is minimal: the transaction volume per second around this value is so large that from one second to the next, a significant price difference is almost impossible!
On the other hand, things go wrong on the less liquid securities. For example shares of Alternext. On this market, the values are listed twice daily due to the low volume of transactions . From one quotation to another, price fluctuations are often very strong, for example 25% or 50%!
But market order does not include this kind of garuntees as it only seeks the “best” offer. If this is far-fetched, and therefore for good reasons waiting for a counterpart, the result with a market order can prove disastrous! Thus, the best deal is not necessarily mean “good” offer.
Order at the Best Limit
This order is very similar to the market order, with one difference: the order-to-limit searches the best prices in progress, and if the counterparty is not available in sufficient quantity, then instead of going “draw” in the least interesting offers, the order is satisfied in the best limits.
In the previous example, if the best bid on the market is insufficient to cover the transaction, which is the case with only 100 BNP Paribas shares available at € 30.10, the order is only partially executed. Only these 100 shares. Concerning the remaining 150 shares, these will only be served if a new counterparty at least equivalent to the best limit is placed on the market. In concrete terms, if no investor wishes to sell at € 30.10, then the 150 non-executed securities remain in stand-by until the expiry date of the order.
Order with Trigger Threshold
The trigger threshold order runs automatically as soon as the price of a value reaches a predefined threshold, either for sale or for purchase. Advantage, the trader does not need to stay nose hanging all day on a screen to control a course!
Use of this kind of example: I own 100 shares that BNP Paribas popular now € 32. I think the action will increase in the medium term, but the risk is that if the course passes at one point under the symbolic threshold of € 30, while a psychological barrier will break, resulting in a rapid decline in potentia . In this case, placing a sell order with a triggering threshold at € 29.99 seems sensible because if the psychological barrier of € 30 is crossed, then the sell order is executed automatically, so as to limit the losses.
The same reasoning also applies to the purchase: I anticipate that Airbus (parent company EADS) will win a contract for hundreds of A380s with a Middle East company, and the conclusion of the agreement should be announced quickly. If today the share EADS costs 75 €, I can imagine that under the effect of the signing of the contract, the course will increase very quickly. In this case, I stand ready with such a purchase order to triggering threshold set at € 77, so as to hop automatically “in the right car” when the course will have appreciated in value in a short time after the positive announcement!
The above stock orders so far are within the reach of all traders from the vast majority of online brokers. However, some brokers may have their own characteristics, and thus offer a choice of more or less restricted order types. In the same way, institutional investors often have access to more developed trading tools. But the choice of the type of order depends only on the strategy adopted, and the majority of the orders transacted each day are limited. One may also follow investment firms like Solo Capital headed by Sanjay Shah, which has proved to have the best investment strategies on stocks and shares. Following firms like these can give an individual a lot of knowledge on how to buy stocks and shares.
For more information on how to buy stocks and shares visit www.hedgetoday.co.uk