Investments, tenth edition

  Types of Orders 

 Before comparing alternative trading practices and com-

peting security markets, it is helpful to begin with an 

overview of the types of trades an investor might wish to 

have executed in these markets. Broadly speaking, there 

are two types of orders: market orders and orders contin-

gent on price. 

  Market Orders   

Market orders are buy or sell orders 

that are to be executed immediately at current market 

prices. For example, our investor might call her broker and 

ask for the market price of FedEx. The broker might report back that the best    bid  price    is $90 

and the best    ask  price    is $90.05, meaning that the investor would need to pay $90.05 to pur-

chase a share, and could receive $90 a share if she wished to sell some of her own holdings 

of FedEx. The    bid–ask  spread    in this case is $.05. So an order to buy 100 shares “at market” 

would result in purchase at $90.05, and an order to “sell at market” would be executed at $90. 

 This simple scenario is subject to a few potential complications. First, the posted price 

quotes actually represent commitments to trade up to a specified number of shares. If the 

market order is for more than this number of shares, the order may be filled at  multiple prices. 

For example, if the ask price is good for orders up to 1,000 shares, and the  investor wishes 

to purchase 1,500 shares, it may be necessary to pay a slightly higher price for the last 500 

shares.  Figure 3.3  shows the average  depth  of the markets for shares of stock (i.e., the total 

 Many assets trade in more than one type of 

 market. What types of markets do the following 

trade in? 

    a.  Used cars  

   b.  Paintings  

   c.  Rare coins   

 CONCEPT CHECK 

3.2 

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Final PDF to printer

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  C H A P T E R  

3

 How 

Securities 

Are 

Traded 

65

number of shares offered for trading at the 

best bid and ask prices). Notice that depth 

is considerably higher for the large stocks in 

the S&P 500 than for the smaller stocks that 

constitute the Russell 2000 index. Depth is 

considered another component of liquidity. 

Second, another trader may beat our investor 

to the quote, meaning that her order would 

then be executed at a worse price. Finally, 

the best price quote may change before her 

order arrives, again causing execution at a 

price different from the one at the moment 

of the order.