All trading basics

PLACING A SHARE ORDER: a few tips to make life easier

Basic notions

Any trade on the stock exchange results in a pairing between an order placed by a buyer and an order given by a seller. Investors wishing to purchase shares in a company on the exchange at a given price could not do so were it not for sellers on the other side offering to sell shares in the same company at a price the buyers are willing to pay.

Before placing an order, serious investors should check quotes for the stocks they are preparing to trade. The quoted price shows what was paid in the most recent trade. This, however, is a historical amount. It is really the "bid" and "ask" prices that tell you the true price at which a stock is trading. The "bid" price is the highest amount an investor agrees to pay to buy shares in a company, while the "ask" price reflects the lowest price at which an investor will agree to sell. Thus, an investor wishing to buy a certain number of shares in a company should consider the "ask" price, while someone who is looking to sell should pay closer attention to the "bid" price.

We can illustrate this with an example. Mr. Jones holds 500 shares in ABC Inc. that he wants to sell for $30.25. Let's suppose that the latest trade in ABC shares was conducted at a price of $30.25 and the "bid" and "ask" prices are $30.25 and $30.30 respectively. Two lots (200 shares) are showing on the bid side, while five lots (500 shares) show on the "ask" side.

By analyzing information on quotes for this stock, we can conclude that Mr. Jones could at best sell 200 shares right away at the price he is asking. This is the quantity matching the two lots showing on the "bid" side. One solution for him would be to place a sell order valid for a month covering 500 shares at a price of $30.25 a share. This way, a partial trade covering 200 shares at $30.25 would take place immediately. The balance of the order, namely 300 shares at $30.25, would remain valid and could ultimately be executed provided the "bid" price rises again to the price sought by Mr. Jones.

Many investors believe incorrectly that the price of the latest trade is the price at which shares can be bought or sold. If Mr. Jones had followed this reasoning and placed a sell order for 500 shares of ABC at the market price, he would have sold 200 shares at $30.25 and 300 shares at a lower price than what he hoped to get ($30.20,for example).

Orders placed outside stock market operating hours: a warning is called for

The opening price of a stock on the exchange reflects certain factors related to the market as a whole (such as economic or financial news) and specific factors concerning the company (such as financial results) that would normally be made public between the exchange closing time the day before and opening time the current day. This is why the price of a stock at market opening often differs from the price at the close of the previous session. Major price shifts occur frequently when important news is announced.

In setting the price of an order outside stock exchange operating hours, be sure you are aware beforehand of any factors such as those mentioned above. The surest way of protecting yourself is to use "limit orders" rather than market orders. By indicating the maximum price per share you are prepared to pay for the stock you want to buy, or the minimum price you are willing to accept in selling your shares, you are in fact protecting yourself against any major price shift that could occur before markets reopen.