Question

Ana is an experienced investor who enjoys researching and investing in individual stocks that appear promising. On August 12, 2011 she is reviewing the trading information for a new home electronics company TechUp, presented in the table below. Trade Time: Open: Day's Range: Stock Information for TechUp 1:02PM EDT Last Trade: 64.79 62.61 Prev Close: 61.00 60.28-68.10 Change: +3.79 (0.06) She is extremely confident in the future performance pf TechUp and wants to buy 100 shares of stock regardless of the price, therefore she places a order at 1:02PM EDT. She knows that the execution price for this type of order the last-trade price at the time she places the order. Her broker is able to execute the trade within minutes, obtaining her 100 shares at $65.03 each. Suppose the price of the stock rises for the rest of the day, eventually closing at a price of $72.59. In this case, the total value of the shares she purchased between the time of her purchase and the end of the day. If she had instead placed a order at 1:02PM to buy the same number of shares only if the price fell to $62, she would have by the end of the day instead.

Answer 1

- When an investor wants to buy a stock irrespective of the trading prices, he places a market order which means that the order will be executed at the prevailing market price (i.e. at the least ask prices among all sellers). In the given case Ana wants to execute her trade irrespective of price and hence "she places a market order at 1:02PM EDT"

- When a market order is placed to buy or sell than the broker simply executes the trade at the best available bid price/ask price as the case may be. That price is generally very close to the last traded price (i.e. could be a little up or down as compared to the last price) just before the place of order. Therefore, "the execution price for this type of order is close to the last-trade price"

- Since the price of shares increased between her purchase time in the day and day's closing time, hence "the total value of the shares she purchased increased by 11.6% between the time of her purchase and the end of the day". (Calculated as (72.59-65.03)/65.03)

- On the contrary to a market order, the other type of order is limit order wherein the buyer or seller places the order subject to its execution at a specified price. For e.g. if Ana had placed an order to buy 100 shares only if the price fell to $62, it is called a limit order. If this would have happened, her order wouldn't have got executed as the price kept on increasing for the rest of the day from levels of 64.79

Therefore, "If she had instead placed a limit order at 1:02PM to buy the same number of shares only if the price fell to $62, she would have seen her order not getting executed by the end of the day instead.