Types of Orders Here is some price information on FinCorp stock. Suppose that Fi
ID: 2808843 • Letter: T
Question
Types of Orders Here is some price information on FinCorp stock. Suppose that FinCorp trades in a dealer market. Bid Ask 55.25 55.50 a. Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? b. Suppose you have submitted an order to sell at market. At what price will your trade be executed? c. Suppose you have submitted a limit order to sell at $55.62. What will happen? d. Suppose you have submitted a limit order to buy at $55.37. What will happen?Explanation / Answer
Solution:
The Bid price is the highest or maximum price at which a dealer in a market will buy a security.
The Ask price is the lowest or minimum price at which a dealer in a market will sell a security.
Thus Bid price is a price at which a dealer will buy a security and ask price is a price at which the dealer will sell a security.
a. Since we have to buy from the market and the dealer has to sell to us, we will be offered the selling price by the dealer which is the Ask Price. Thus the trade will be executed at the Ask price of $ 55.50.
b. Since we have to sell in the market and the dealer has to buy from us, we will be offered the buying price by the dealer which is the Bid Price. Thus the trade will be executed at the Bid price of $ 55.25.
A limit order is an order to buy or sell a security which is governed by a limit price or a pre- determined price.
In case of a limit order to buy a security, the trade of buying a security will be executed only if the market price is equal to the limit price (set by the buyer) or a price below or lower than the limit price.
In case of a limit order to sell a security, the trade of selling a security will be executed only if the market price is equal to the limit price (set by the seller) or a price above or higher than the limit price.
c. Thus in case of a limit order to sell at $ 55.62, the order will not get executed as the Bid price i.e., the price at which the dealer is ready to buy is $ 55.25, which is lesser than the limit price of $ 55.62.
d. Thus in case of a limit order to buy at $ 55.37, the order will not get executed as the Ask price i.e., the price at which the dealer is ready to sell is $ 55.50, which is higher than the limit price of $ 55.37.
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