Question

You decide to invest $1,000 using a market order.  At the time of your purchase, the order book looked like this:

Volume (100s)	Price	Volume (100s)	Price
2	$0.74	4	$0.81
2	$0.72	5	$0.85
3	$0.70	3	$0.88
7 3 10	$0.65 $0.60 $0.01	8 2 2	$0.90 $0.95 $0.99

1. How many shares did you buy?
2. What was your average purchase price?
3. What would your average purchase price be if your market order been for $2,000?
4. Consider the trader who entered the limit order for 1000 shares at $0.01.  What are they hoping will happen?

Answer 1

a) Since I am a buyer, I would look for the Ask price in the market. Ask price is the price at which the sellers are ready to sell the shares in the market. Thus, the number of shares to buy would be calculated as follows:

- 4 * 100 * 0.81 = $324. (Remaining Amount = 1000 - 324 = $676)

- 5 * 100 * 0.85 = $425 (Remaining Amount = 676 - 425 = $251)

- Since $251 is only remaining, therefore the number of shares would be calculated as 251/0.88 = 285 shares (decimal value not considered because the shares can not be in decimals)

Thus total number of shares is 400+500+285 = 1185 shares.

Total amount invested = 324+425+(285*0.88) = $999.8

b) Average purchase price = 999.8 / [(400+500+285)] = $0.84

c) Avg purchase price of amount is $2000

Number of shares :

Amount invested in the first 5 transactions = (400*0.81) + (500*0.85) + (300*0.88) + (800*0.90) + (200*0.95) = $1923. Amount remaining = $77. Thus, number of shares that can be brought in $77= 77/0.99 = 77 (decimal value not considered because the shares can not be in decimals).

Total amount invested = 1923 + (77*0.99) = 1999.22

number of shares= 400+500+300+800+200+77 = 2277

Avg purchase price = 1999.22 / 2277 shares = 0.88

d) A trader who has who entered the limit order for 1000 shares at $0.01, is of the view that the share price of the company to crash badly. Also, there are limited number of buyers in the market which clearly shows that the buyers are bearish on the price.