Part 6 of the Classroom series deals with placing orders to buy or sell shares.
- How do I place an order with my broker?
You could call up the broker’s office and place your order. Alternately, you could place the order online through the broker’s website.
- Is buying and selling shares over the internet safe?
It is. But then again, no system is foolproof, and there have been instances of even the most supposedly secure websites being hacked. If online is your preferred mode of trading, go for the broker with good technology capabilities. Online trading is convenient, but the speed with which you can place your orders and those getting executed, will depend on factors like your internet speed and how good your broker’s trading platform is.
- How does the stock exchange’s trading system match the various buy and sell orders fed into it by brokers all over the country?
The stock exchange trading system matches the best buy order (bid) with the best sell order (offer) and vice-versa. The best buy order is the one with highest price and the best sell order is the one with lowest price. If somebody is looking to buy a stock, he would be looking for a seller who is quoting the lowest price. Similarly, somebody wanting to sell a stock would be looking for a buyer offering the highest price.
On the trading screen, all the buy orders will appear on the right side, and the sell orders on the left side. Something as shown below
If two orders of the same nature (buy/sell) have the same price, the order which was entered into the system first will get executed first.
- If I am placing an offline order, how do I ensure that my broker does not cheat me?
If you specify a price at which you want your shares to be bought or sold, the broker cannot execute the trade outside the limit of the price set by you. This is known as a limit order in market parlance, wherein you have clearly mentioned the price at which you want the shares bought or sold.
But your buy/sell order will be executed only if there is a corresponding sell/buy order the same price, or a better price than what you specified.
If you want to buy 500 shares of a company at Rs 50, and the matching seller has only 200 shares to offer, then your order will only be partially executed. You will get 200 shares, but will have to wait for another seller looking to sell 300 shares at Rs 50.
Before the advent of electronic trading, it was easy for brokers to cheat their clients. That is because the trades were done verbally in the trading ring of the stock exchange. Today, the stock exchanges send a trade confirmation message to your registered e-mail id or mobile number when the broker does a transaction in your account.
- What if I don’t specify a price to my broker and just ask him to sell or buy my shares?
In that case, the broker will buy or sell the shares at the best price prevailing in the market at that time. This type of order is known as market order.
Say you want to sell 500 shares of a company. The best price quoted by a buyer is Rs 49, and it is for only 50 shares. The next best buyer is quoting Rs 48 and he wants to buy 100 shares. The third best buy quote is Rs 47 for 350 shares.
When the broker feeds your order into the trading system, the first 50 shares will be sold at Rs 49, next 150 shares at Rs 48 and the last 350 shares at Rs 47.
If you are buying shares at the best market price, the system will first match your order with the lowest sell order. If the entire order has not been fulfilled, the system will match the outstanding quantity with the next lowest price, and so on, till the entire order is executed.
- I have heard my friend mention stop loss order? What is that?
Stop loss orders are mostly placed by day traders who buy and sell shares within the same day. A stop loss helps such players minimize losses if the price moves against them. The stop loss order will be triggered once the stock price achieves or crosses a specified level.
Say a trader has bought a stock at Rs 100 and expects it to rise to Rs 105 during the day. If he does not want to lose more than Rs 5 on a single share, he will set a stop loss of Rs 95. When the stock price hits Rs 95, the stop loss will be triggered and without the trader having to place a sell order, the system will sell his shares.
- Should I keep a stop loss?
Even the most seasoned traders keep a stop loss. That is because it helps minimize losses, besides instilling discipline. It helps you plan trades better if you know beforehand the maximum amount you are prepared to risk.
- What is ‘squaring off’ of positions?
Doing an opposite trade of the same quantity as done earlier in the day is known in market parlance as squaring off. If you have bought 500 shares of company XYZ, you square off your position by selling 500 shares of XYZ. Also, you could sell 500 shares of XYZ and square off your position later in the day.
A liquid stock is one that is actively traded in the market, and sees good trading volumes. Such a stock can be bought and sold in large quantities, without the purchase or the sale impacting the price of the stock by much. The reason being that when you go to buy a liquid stock, there will be plenty of people wanting to sell the stock to you. Likewise, when you go to sell the stock, there will be plenty of people wanting to buy the stock from you.
- What is an illiquid stock
Stocks which see low trading volume are called illiquid stocks. A big buy or sell order in an illiquid stock could cause the price to swing sharply. That is because if you want to buy a stock and there are not enough sellers, you will have to pay the price that the sellers are demanding. Similarly, of there are not enough buyers when you want to sell a stock, you will have to settle for a price decided by the buyers.
- Why does liquidity matter?
Liquidity matters for institutional investors, who always buy and sell in large quantities. If a stock is illiquid, a big buy order will push the price sharply higher and the average cost of buying a large block of share will be much higher than what an institutional investor would be willing to pay.
Likewise, the average price realized by selling a large block of illiquid shares will be lower than what the institutional investor would have been hoping for.
Even if a company has good fundamentals, institutional investors will look at the liquidity in the stock before buying it. Because if a stock is illiquid, they will not be able to sell it quickly enough in case of distress.
For earlier installments on the Classroom, visit these pages below:Classroom | Why markets exist, and should I invest in stocks? (Equity: Part 1)
Classroom | Starting your stock market journey (Equity: Part 2)
Classroom | Can I get rich fast by investing in shares, and other questions (Equity: Part 3)Classroom | How to open a demat account and select a broker (Equity: Part 4)
Dealing with the stock broker (Equity: Part 5)