Let us imagine an investor, intending to purchase stocks, who did not yet open an account at certain broker company. He/she should, firstly, make his/her mind what type of financial intermediary services he/she would need, as choices usually include opening an account at a full-specter service brokerage firm, or at a ”discount brokerage firm”.
Some investors may decide they are in need of services, offered by both brokerage firms. If the investor pursues advice or wide-scale analysis, he would probably ask for assistance at the brokerage company, offering full-specter of services. If the investor has made a decision of purchasing a concrete financial instrument, he would probably use purchasing and selling services from a brokerage firm, specialized in this sphere. A thing, which investors should have in mind is, that full-service brokerage firms will name a higher price for their intermediary services.
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The procedure of opening an account usually is as follows. The brokerage firm will require filling a specified form, similar to that, concerning opening a bank account. The form is to be filled and sent back to the brokerage company along with a check. This form will be processed by company’s administration and in a few weeks time it will be sent back to the investor with details of the account, including account number. With this already done, the investor may now call an expert from the brokerage firm and send purchase orders.
As far as types of orders are concerned, there are usually several orders, used the most. First and probably most popular order is the market order. If the investor submits a market order, that means he/she requires his/her broker to buy or sell securities at the best possible price for the moment. Market orders will always be executed. What’s specific about them, however, is that these orders will not likely be executed at the price the investor prefers or expects. For instance, he/she intends to purchase a number of shares of ”ABC” company. He/she simply calls the brokerage firm and the expert on the phone announces that currently ”ABC” is trading at a bid price of 45.00 USD per share and ask price of 45.10 USD per share. The investor submits a purchase order of 50 shares to the broker. A bit later the broker calls back and informs investor that he bought 50 shares of ”ABC” at the price of 45.20 USD per share. It seems that price rose during the time interval between submission and execution of the market order. Of course, investors should have in mind the order could have been executed at a lower price, 44.80 USD, for example, if sellers were more than buyers at that moment.
This another often used type of order. When submitted, this means the broker will buy or sell a defined amount of defined shares at a defined or better price. If this price is not in the current market price range, then it is usually ”away from the market” and will be registered in the so called book of orders below the other active orders. This means that other investors submitted their limit orders earlier and all registered orders will be filled in this current placement. This is not a rare situation, so actually there is no guarantee that limit orders will ever be filled. Before making a decision whether to use a market of limit order, every investor should be aware of advantages and disadvantages of both the ”guaranteed” order completion, which could be different than expected, and paying the preferred price, but not knowing whether the order will ever be completed.
This is a conditional market order, which is activated as the investor makes a transaction at a price, predefined by him. Stop order to buy is transformed into market order to buy if other investors are making transactions at the predefined stop price or higher. Stop order to sell is transformed into market order to sell, if other investors are making transactions at the predefined stop price or lower.
Alongside the abovementioned orders, there are also stop-limit orders. Stop-limit order to buy means that at the very moment trade reaches the predefined price, the order is transformed into a limit order to buy. Analogically, stop-limit order to sell means that at the very moment trade reaches the predefined price, the order is transformed into a limit order to sell.
Lastly, investors can submit the so called ”Fill or Kill” orders. They are usually used to trade futures and options contracts, but are also valid in stock trading. These orders are limited in time. For instance, if the investor submits a 25 minute-”Fill or Kill” order, that means the order will be cancelled, unless it is filled in the next 25 minutes.
Stock trading practice knows two more types of orders, which are defined by their time period, a Day order and the so called ”Good Till Cancelled” order. The day order is valid only during the day it was submitted. “Good Till Cancelled” orders are more specific. Until second order by the investor, the broker fills the submitted one, as it can be executed at any time. “Good till Cancelled” orders need to be reaffirmed two times during the year, more precisely – every six months. Stock exchange regulations state, that these should be the last working days in April and October.