Question

• Describe the differences among the following three types of orders: market, limit, and stop-loss.
• What is meant by a short sale?
• Describe the meaning of buying on margin.

Answer 1

Market order:
A market order executed to buy or sell a security immediately on the prevailing market prices. It ensures that the order completed but did not assure the fulfilling price.

• For example, An investor desires to acquire shares of ABC stock immediately. The investor could submit a market order, and this order executed quickly at market price.

Limit order:
Execution of a Buy Limit order will be at the limit price, or lower and implementation of a Sell Limit order will be at the limit price or higher.
It says the broker to halt trading if the price is disadvantageous exceeding a particular amount.

• For example, An investor wants to purchase shares of ABC stock for no more than $10. The investor could propose a limit order for this amount, and this order will only complete if the price of ABC stock is $10 or below.

Stop-loss order:
A stop-loss order applied to restrict losses. A stop-loss order executed to buy or sell a stock once the price of the stock touches the specified rate, identified as the stop price.

• For example, if a stock priced at $200, a stop-loss order may be placed by an investor at $140. If the price touches or falls below $140, this will trigger an automated market sell order for the investor-owned stocks. In this example, this would limit the investor’s losses to 30%.

Short sale:
It sells a stock that the seller does not own; in this first, settlements made to borrow shares of the security. Once the agreements made, the investor sells the shares in the public market intending to repurchase them. The foremost benefit of a short sale is that it enables traders to profit from a decline in price. Short-sellers try to sell shares while the price is high and repurchase after the price has fallen. It is essential to know that short sales deemed risky because if the stock price increases instead of drops, there is no limit to the investor’s potential loss.

• For example, An investor estimates that Stock X, which is trading at $100 per share, will decrease when the company announces its annual profits in one week. Consequently, the investor borrows 100 shares from a broker while short-selling those shares to the market. Now the investor “shorts” 100 shares of Stock X, which he did not hold, believing that the share price will decrease.
• After a week, Stock X’s price falls to $90 per share after announcing annual profits. The investor determines to stop the short position, so he repurchases 100 shares of Stock X from the open market at $90 per share and delivers those shares to the broker. The investor earns a value of $10 per share, which is a total of $1,000.

Buying on margin:

Generally, buying on margin is practised by short-sellers of the stock. In simple words, buying on margin indicates funding with borrowed money. It lets using money from a broker to purchase inventory, we can say it as a credit from our brokerage firm. Buying on margin allows us to buy more extra stock than we would be worthy of buying usually. It requires the initial margin and maintenance margin. Buying on margin increases both earnings and losses.

• For example, An investor wants to buy 1,000 shares of Company ABC for $5 per share but does not have the necessary $5,000. He only has $2,500. If he buys the shares on margin, he borrows the other half of the money from the brokerage firm and buys the shares the ABC Company.
• If the value of the Company ABC shares drops a certain point, say 25% of the original $5,000 value.
• The brokerage firm may execute a margin call, suggesting that in a few days, he needs to put more extra cash or sell some of the shares to neutralize all or part of the variation among the actual stock price and the maintenance margin. If the stock rises, then he will be in a more profitable position.

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