Question

You submitted an order to buy the Southern Province Cement Co. security. The bid and ask prices at the time of the order submission were $50 and $51. What should be the actual transaction price or result if (a) your order was a market order to buy (b) your order was a limit order to sell at $51? (c) Would you expect the bid-ask spread to be higher on actively or inactively traded stocks?

Answer 1

Answer (a)

Market order to buy is filled at the current market selling price of security, hence in this case ask price of Southern Province cement Co. security is $51.

So, actual transaction price will be $51.

Answer (b)

Limit order to sell is filled when market price of security reaches equal to limit order or above.

In this case bid price on which Southern province Cement Co. security is available is $50. hence a limit order to sell at $51 will not be filled,

Answer (c)

The bid ask spread can be higher in case of inactively traded stocks, as there may be low or nil buyers/seller for a inactively traded stock.