Lecture 42: Trading 1

Overview of Trading Concepts

Market Orders:

• Definition: Buy/sell at the best current price (Market Sell Order: highest bid; Market Buy Order: lowest offer).

• Characteristics: Immediate liquidity, price may vary at execution, known quantity, and immediate execution advantages.

Objectives:

• Differentiate market, limit, and stop orders.

• Calculate returns for margin and short sales.

• Determine conditions for margin calls.

Order Execution Mechanics:

• Market Makers: Buy at bid prices and sell at ask prices, profiting from the bid-ask spread.

  • Bid: Price dealers buy at.

  • Ask (Offer): Price dealers sell at.

  • Bid-Ask Spread: Difference between buy and sell prices.

Types of Orders:

1. Market Orders:

   • Immediate execution at market price.

   • Advantages: Guarantees execution and quantity.

   • Disadvantages: Price may vary.

2. Limit Orders:

   • Set at a specified price, active until conditions met.

   • Advantages: Price certainty.

   • Disadvantages: Timing and quantity uncertainty.

3. Limit Order Book: Displays ranked limit orders, providing market transparency.

Key Takeaways:

Special Orders:

• Stop Loss Orders: Activated when stock drops to a specified price; risks include slippage.

• Stop Buy Orders: Activated when stock rises to a specific price; used in short selling risk management, with execution risks in rapid increases.