Financial transactions on equity exchanges can occur in several differing ways depending on the transaction orders used. Transaction orders fall under several major categories. Each type of transaction order modifies the transaction’s conditional execution in different ways. The major categories of transaction orders are Market Orders, Limit Orders, Stop-Action Orders, and Completion Orders. Transaction orders generally fit within these four categories.
In order to understand transaction orders, you must first understand the differences in pricing. In transactions, there are two specific prices for any security. The first is the asking price, and the second is the bidding price. Equities traded on firms have both an ask price and a bid price. These two prices have an extremely small difference between them, usually limited to a few cents. Orders to buy are executed at the asking price; orders to sell are executed at the bidding price. The minor difference is the share’s price spread.
“Market orders” are the most general purchase and sell trading order. These orders are triggered by the conditional requirements of the other orders. The market order is the simplest transaction order. This order instructs a broker to immediately execute a purchase or sale of a share at the best possible price available. If executed for selling, your price is the highest price. If executed for buying, your price is the lowest price.
“Stop Orders” are not executed until a share reaches a price, upwards or downwards. Stop orders are conditional completely on the price, and will not be executed if prices do not reach that number. Since they are price based, they are essentially based completely on demand for shares within the marketplace.
The first of two stop orders is known as a “Sell-Stop” Order. This order is used to sell shares when a price has fallen to a specific level. Typically, these orders are used to sell shares that have entered a free-fall, before larger losses are incurred. This order can only be used with sales below the current market price.
The second of these two orders is known as a “Buy-stop” order. A buy-stop order is an order to purchase shares only if they rise above a set price. This order can only be used above the market price. Since the order only executes at the set price and above, the purchase may be more expensive than planned. Buy-stop orders may be used with short shares to limit losses from price rises. In this case the order prevents losses by buying shares to close the shorts automatically if prices begin to rise.
“Limit Orders” instruct a purchase or sale relevant to a specific price. Purchase limit orders instruct brokers to buy shares at specific price or below. Sale limit orders instruct brokers to sell shares at or above a specific price. Limit orders are only executed if their conditions are met, and may not be executed if prices are not met. Until they are fulfilled, limit orders are kept in a limit-order book. After they are filled they are crossed out. The commission charges for limit orders are typically higher than market orders.
These orders are based on ability to complete (or fill) trades within a specific period of time. There are three basic completion orders, and four other completion orders based on specific time periods. The three basic completion orders are “All or None”, “Fill or Kill”, and “Immediate or Cancel” orders.
An “All or None” order is completion order requiring that all shares desired for the transaction are immediately fulfilled. If the order cannot be completely fulfilled the order is canceled, but kept on record. If it can be filled at a later date it will be completed.
A “Fill or Kill” order must be completed in full, just like an “All or None” order. The difference between the two occurs when an order is not completed. A “Fill or Kill” order does not remain on the books for future completion. The order, if not successful at the time specified, is deleted from the books and canceled entirely.
An “Immediate or Cancel” order is similar to a “Fill or Kill” order. Instead of requiring the full duration of shares to be fulfilled, Immediate or Cancel orders request as many shares as possible. The remainder of the order is cancelled, and the order does not remain on the logbooks to be completed at a later time.
There are four more orders based on specific time durations. These orders vary between set durations of time and durations you request.
A “Day” Order requests a transaction at a set price level for a single day. If the purchase is not possible by the end of the trading day, the order is canceled. This order ends at the end of the day it is declared, and does not carry over into the next day.
A “Good for Month” Order requests a transaction at a set price level that ends with the trading month. This excludes any non-trading days such as holidays and weekends. If the transaction is filled or the preferred transaction price is not reached, the order is cancelled.
A “Good Through” Order lasts until the date specified. This order purchases share if below a set price, or sells shares of they are above a set price, at any point during this time period. The order ends if it is canceled by you or if reaches the closing date.
A “Good till Canceled” Order is the same as other “Good Through” orders without date restrictions. They remain open indefinitely until completely filled or canceled. There is no automatic timeout by definition, but several brokers implement 90 day limits on these orders.
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