If you have a full-service broker chances are that you will not need to know these information as the broker will do every thing for you. However it is wise to learn so that you can become more knowledgeable about investing.
If you are have a discount broker then you need to tell him what you want him to do. To be able to do this properly you need to know certain terms so that he will do what you want. You will then communicate this to him by phone or by any previously agreed means in your agreement or brokerage contract.
Here is how things goes. On the market there are people who want to sell stocks and other securities and those who want to buy.
Let say that three people want to sell stock of company x at the following prices. These are the sell prices or the ask prices.
Person A $50
Person B $51
Person C $52
Now three people want to buy the same stock at the following prices. These are the bid prices.
Person D $48
Person E $47
Person F $46
Note that those that are selling are always offering a higher price than those who are buying. The difference between the two is called the ask-bid spread.
In our example the ask-bid spread is $2. This information means that the buyer will have to raise his bid price by two dollars to be able to buy his security or the seller has to lower his ask price by two dollars to be able to sell his security.
What is important is that the person who is ask the lowest price will be given priority and his stocks will be sold first. The same is for those who want to buy stocks, the person who bid the highest will be given stocks in priority.
However if there is a deadlock and that no stock is changing hands, the the seller can suggest the highest bidding price and his stocks will be sold. Using the example above if person A decreases his ask price to $48 then his stocks will be sold to person D. The opposite is also true. Person D can increase his bid price to $ 5o dollars as a result he will be able to get the stocks that person A is selling.
Now what orders are you going to give the broker?
1. Market Order: The broker will buy the stocks at the best available price. In this case if you are person D you will be giving the broker the instruction to buy shares at $50. This order will be executed immediately.
Limit Order: This will be for the broker to buy only when stocks are available at a given price or to sell only when there are buyers that are prepare to buy stocks at the price that you want.
Stop Order: This would mean that you are giving your instruction to stop buying once stocks are exceeding a level and are being too expensive to buy. This is called a stop-limit. You can also give a broker an instruction to sell your stocks once the value of the stock fall below a certain level. This may be because the stock has been bought at a higher price and that the lower it falls the more loss you are going to make on it. That is why such an order is called a stop-loss.
All or None (AON): This means only to buy stocks if all your order can be fulfilled. Sometime if you want to buy 500 stocks of company x at $50 and that there is a seller of 400 stocks at $50, normally the broker will buy the 400 stocks for you. In the All or none the order will be executed only if there is a seller of 500 stocks.
Day Order: This order will be only for the day. That is because some order can continue until the condition for the order is satisfied.
Good Till Canceled (GTC): This order will remain valid unless it is executed by the broker or cancel by the person.
Fill-Or-Kill: If this order is not executed immediately then it is to be canceled.
This now end the three part series on the broker and the service that they offer.
Do you have any question or you want to talk about you experience on using a broker? Leave a comment below.
How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
What is a stock?
Stocks have higher return than bonds
How to be rich buying stocks!!
Should i sell my stock and hold cash?
Introduction to diversification
How and when dividends are paid?
what is a stock exchange?
How to choose a broker - part 2?