Investments, tenth edition

  Price-Contingent Orders 

  

Investors 

also may place orders specifying prices 

at which they are willing to buy or sell a 

security. A limit buy order may instruct the 

broker to buy some number of shares if and 

when FedEx may be obtained  at or below  

a stipulated price. Conversely, a limit sell 

instructs the broker to sell if and when the 

stock price rises  above  a specified limit. A 

collection of    limit  orders    waiting to be exe-

cuted is called a  limit order book.  

  Figure 3.4  is a portion of the limit order 

book for shares in FedEx taken from the 

Bid

FDX

FedEx Corporation

FDX

Go>>

ARCA

ARCA

ARCA

ARCA

ARCA

90.04

90.03

90.02

90.00

89.99

14:05:22

14:05:25

14:05:25

14:05:18

14:05:21

NYSE Arca.

ID

Price

Size

Time

Ask

ARCA

ARCA

ARCA

ARCA

ARCA

90.05

90.06

90.07

90.09

90.10

400

104

303

303

404

14:05:21

14:05:21

14:05:21

14:05:18

ARCA

90.01

14:05:17

ARCA

90.08

303

14:05:18

ARCA

89.98

14:05:14

ARCA

90.11

404

14:04:00

ARCA

89.97

100

302

204

302

403

1604

1003

1103

14:05:20

ARCA

90.12

802

14:05:23

14:04:55

ID

Price

Size

Time

Figure 3.4 

The limit order book for FedEx on the NYSE Arca market

 Source: New York Stock Exchange Euronext,   www.nyse.com  , June 22, 2012. 

Figure 3.3 

Average market depth for large (S&P 500) and 

small (Russell 2000) firms

 Source: James J. Angel, Lawrence E. Harris, and Chester Spatt, ”Equity 

Trading in the 21st Century,”  Quarterly Journal of Finance  1 (2011), 

pp. 1–53; Knight Capital Group. 

6,000

5,000

4,000

3,000

2,000

1,000

11/2003

08/2004

05/2005

02/2006

11/2006

08/2007

11/2009

08/2010

05/2011

05/2008

02/2009

Average Depth (Sum of Shares 

Offered at Best Bid and Ask Prices)

–

S&P 500 firms

Russell 2000 firms

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Final PDF to printer

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66

P A R T   I

 Introduction

 What type of trading order might you give to your broker in each of the following circumstances? 

    a.  You want to buy shares of FedEx, to diversify your portfolio. You believe the share price is approxi-

mately at the “fair” value, and you want the trade done quickly and cheaply.  

   b.  You want to buy shares of FedEx, but believe that the current stock price is too high given the firm’s 

prospects. If the shares could be obtained at a price 5% lower than the current value, you would like 

to purchase shares for your portfolio.  

   c.  You plan to purchase a condominium sometime in the next month or so and will sell your shares of 

Intel to provide the funds for your down payment. While you believe that the Intel share price is 

going to rise over the next few weeks, if you are wrong and the share price drops suddenly, you will 

not be able to afford the purchase. Therefore, you want to hold on to the shares for as long as pos-

sible, but still protect yourself against the risk of a big loss.   

 CONCEPT CHECK