Questions and Answers
- Describe the differences among the following three types of orders: market, limit, and stop loss
Two basic performance choices occur when a stock sell or purchase order is placed by an investor, that is, either at the limit or market. For market, execution instructions are issued at the earliest convenience, either at current or market price. On the other hand, for limit, instructions are allowed for performance either at or below a particular price or at a price exceeding the selling price (Harris, 2010). Stop loss is meant to limit money lost on a single trade by ensuring timely exit as soon as a predefined price is attained.
- What is a short sale?
The term, short sale, defines securities’ transaction that are not owned by the trader in order to make profit from anticipated stock price decline (Polimenis, 2014). In such a transaction, the investor borrows securities anticipating a price decline, sells them and is expected to return equivalent shares at a latter date.
- Describe buying on margin
Buying on margin refers to down payment that a broker receives for a purchased asset. The borrowed funds’ collateral is the marginable security in the account of the investor. A margin account is necessary for the broker prior to buying on margin.
- Why is it illegal to trade on insider information?
When a trader accesses privileged business information that is not privy to the public, then such a trader is said to have traded on insider information. Given that the information is not available to all investors, the one with the information enjoys undue advantage over other investors. This use of information that is non-public, violates the concept of transparency that defines the market. Market are defined in such a manner that information is released to all stakeholders at the same time (Harris, 2010). The only differentiating factor then is the ability to analyze and interpret the provided information. Allowing trading based on insider information not only gives undue advantage to others, but also disrupts smooth market operation (Polimenis, 2014). Such occurrences can lead to loss of faith from the underprivileged investors and consequently, they may shy away from trading.
Harris, L. (2010). Regulated exchanges: Dynamic agents of economic growth. Oxford University Press.
Polimenis, V. (2014). Slow and fast markets. Journal of Economics and Business, 57(6), 576-593.