Module 9 CONTRACT FOR DIFFERENCE (CFD s) Please work through as much of the following module before your training session. Upon completion, please do not hesitate in moving forward to the next module. We recommend contacting customer support for any assistance. There is an EQ Trader Help section which offers a comprehensive guide into the program as well as charting and trading tips. Did you know? A CFD s (or Contract For Difference) is simply an agreement to exchange the difference in value of a particular financial instrument between the time at which the contract is opened and the time at which it is closed. CFD s were introduced into Australia in 2002 and are traded in a number of countries throughout the world mainly Europe and the UK as well as Australia. The two main advantages of using CFD s are; 1. You can profit from both rising and falling markets and; 2. You do not pay for the full value of the share traded instead all that is required is a deposit. CFD s are a leveraged product and can help make the most effective use of investment capital. But it is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products. It is strongly recommended that a responsible money management plan is engaged at all times. David Morgan Manager Customer Support & Training Phone: 1800 758 603 Email: mailto:support@eqtrading.com.au 1
Contract for Difference (CFD s) explained Content CFD Trading Explained 2 Go Long or Short 2 Wide Access 2 Real Market Prices 3 CFD share list 3 Adobe down load 3 Standard Schedule 4 Euro Includes 5 IOB Shares 5 Singapore Shares 5 Limited Risk Transactions 5 Limited Risk Premium 5 Margin Percentage 5-6 Dealing hours 6 Interest Calculations 6 Dividend Adjustment 6-7 Cash Adjustment 7 Base Currency 7 ASX Data Fees 7-8 How to Trade CFDs 8 9 The PureDeal Platform 9 Learn about Risk 9 Risk Warning 10-11 Derivative Markets are Speculative & Volatile 11 Money Deposited 12 Currency Risk 12 Advice 12 13 Tax 13 Acknowledgment 13 Going short on individual Shares 13 14 What are the Risks 14 Leverage 14 How to Manage Risk 14 Understand Your Market 14 15 Monitor Open Positions 15 Using Stop Orders 15 Trailing Stops 15 Using Limit Orders 16 Risk and Account Type 16 Common Types of Market Orders 17 Market Order 17 Limit Order 17 Stop Orders 17 Sell Stop Order 18 Buy Stop Order 18 Good Till Cancelled 18 Conclusion 18 2
A CFD (or Contract For Difference) is simply an agreement to exchange the difference in value of a particular financial instrument between the time at which the contract is opened and the time at which it is closed. CFD trading explained For example, when trading a Share CFD you trade at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction. Commission rate for Australian shares is just 0.1% or $12.50 which ever the greater (see Contract Details). When you open a position however, you do not have to pay for the full value of the shares. Instead you put up a deposit, from just 5% for Australian shares. This means you can trade up to 20 times your initial capital. We strongly suggest apply money management rules as discussed in previous lessons. When you close your position, the difference between your opening contract value and your closing contract value is realised. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose. Geared products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products. Go long or short With CFDs you can buy or sell at the quoted price, to profit from rising or falling markets. Other methods of shorting shares are often inconvenient and expensive. Wide access CFDs can be used to trade an extremely wide range of financial products and this means they offer a way to easily start trading across a large cross-section of the market. For example, if you have an interest in shares, the level of Wall Street, the price of oil and the exchange rate of the Australian dollar against the euro, you can trade all of these markets with one CFD provider on one account. 3
When trading our Share CFDs you deal at the real market price. Our Share CFDs give a client exposure to changes in share prices but cannot result in delivery of actual shares by or to the client. 1. Share CFDs are available on over 600 Australian shares, plus constituents of the FTSE 350 Index, S&P 500 Index, NASDAQ 100 Index, Straits Times, JSE 40, Hang Seng, TSE 60 and most major European indices. We also offer CFDs on a selection of IOB Depository Receipts. For full information on the shares we cover please see the list below: Shares List (updated daily; 785KB) PDFs require Adobe Reader, which is available free from Adobe. A list of our share CFDs is also available as an xls file (1.04MB). 2. Deals are transacted at the market bid/offer of the underlying share on the relevant stock exchange. 3. Commission charges for Share CFDs are calculated as a percentage of the transaction value for most markets and as cents per shares for US, Canadian and IOB shares. Where we offer a CFD on an equity that is dual listed and fully fungible for settlement on both exchanges, the commission charges applicable to that CFD will be the charges relevant to the country where primary listing is held. 4. Clients may be informed in writing of the commission rates and financing rates which apply to their account at the time the account is opened. In the absence of such information from us, commission on individual shares is charged according to the standard schedule below: 4
Standard Schedule Country Commission per side Minimum charge (online) Minimum charge (phone) Australia 0.10% A$12.50 A$12.50 UK 0.10% 10 15 US 2 cents/share $15 $25 Euro 0.10% E10 E25 Denmark 0.10% DKK100 DKK250 Norway 0.10% NOK100 NOK250 Sweden 0.10% SEK100 SEK250 Switzerland 0.10% CHF10 CHF25 Greece 0.75% E25 E40 Singapore* 0.20% SGD25 SGD25 Japan 0.20% JPY1500 JPY2500 Hong Kong 0.30% HKD100 HKD100 South Africa 0.30% ZAR200 ZAR300 Canada 3 cents/share CAD25 CAD25 IOB Shares 4 cents/share $15 $25 'Per side' means that commission is charged upon opening and closing the CFD. In relation to our minimum charges: please note that if the size of your deal is such that it attracts our minimum charge on opening, you will be required to also pay minimum charge for that deal on closing, even if you close the deal in a bundle with other deals where the aggregate size is above our minimum size. 5
Euro includes: Austria, Belgium, Eire, Finland, France, Germany, Italy, Netherlands, Portugal, Spain IOB Shares are Depository Receipts that trade on the International Order Book on London Stock Exchange * Nine Singapore shares are denominated in US dollars and have a minimum ticket of US$25. These are: Datacraft Asia Dairyfarm International Hong Kong Land Holdings Jardine Matheson Jardine Strategic Holdings Mandarin Oriental International Ltd Star Cruises Ltd Total Access Communications Want Want Holdings Ltd 5. Limited Risk transactions are available on certain shares at our discretion. The Limited Risk premium for each individual share is given in our Share CFDs List (PDF; 2.0MB) (including Australian and other world shares). Each share's volatility is classified as either low, medium or high and this determines how much premium is charged for a Limited Risk transaction (low: 0.3%; medium: 0.7%; high: 1.0%). The Limited Risk premium for South African and IOB shares is 1.0%. For all other shares the premium for a Limited Risk transaction is normally 0.3% or 0.7% (please note that the Limited Risk premium for all shares may be as much as 1.5% of the transaction value depending on market conditions and the volatility of the particular share). All the Limited Risk premium is charged when the transaction is opened. 6. The Margin Percentage for any particular CFD is calculated as a percentage of the opening value of the current valuation of the transaction. Please see the Share CFDs List (PDF; 2.0MB) for Margin Percentages of specific shares. The Margin Percentage for the constituents of major indices is 10%, while the top 20 UK shares by market capitalisation are margined at 10%. The Margin Percentage for all other shares will be 10% or higher according to volatility and market conditions. The Margin Percentage for a Limited Risk CFD transaction is equal to the amount which would be lost if the Stop were triggered. 6
We reserve the right to alter the Margin Percentage at any time. 7. There is no minimum opening contract value for CFDs on individual shares. 8. Dealing hours are as follows: Australian Shares: 10.00-16.00 (Australian Eastern Standard time)* UK Shares: 08.00-16.30 (London time) American and Canadian Shares: 09.30-16.00 (New York time) Singapore Shares: 09.00-12.30 and 14.00-17.00 (Singapore time) European Shares: Market hours for the relevant Exchange. Please ask for current details *It may sometimes not be possible to quote a particular share before 10.09 9. For CFDs on individual shares, adjustments to reflect the effect of interest and dividends are calculated daily and posted to the client's account daily. i) A daily interest adjustment is calculated, as follows, for any position that is kept open through the official close of business: D = n x C x i / 365 Where: D = daily interest adjustment n = number of shares C = official closing share price i = applicable annual interest rate Note: The formula uses a 360-day divisor for Australian, US and European shares and a 365-day divisor for UK, Singapore and South African shares. Interest in respect of long positions is debited from a client's account and interest in respect of short positions is either credited or debited to a client's account. ii) A dividend adjustment is applied when a share passes its ex-dividend date (including the ex-date of any special dividend) in the underlying stock market. In the case of long positions, the dividend adjustment is credited to the client's account. In the case of short positions, the dividend adjustment is debited from the client's account. The dividend adjustment for shares (Australian or otherwise) varies depending on local tax arrangements - please ask our dealers for current details. 7
10. For CFDs, a cash adjustment may be made to the client's account to reflect the effect of a bonus share issue, scrip or rights issue affecting the underlying share. For Share CFDs in a company which is under offer in a takeover situation, IG will not communicate any wish to subscribe to the takeover offer (i.e. 'assent stock'), where available, unless otherwise instructed to do so. 11. Where you hold a short share CFD position overnight, you may incur a 'borrowing charge' which is quoted as an annual interest rate and posted daily. You will only incur a borrowing charge if we too incur such a charge when we open a hedging trade in respect of the same share in the underlying market; and we will pass the charge onto you with no mark up. To determine whether a charge applies, call our dealers in advance of trading. The borrowing charge, and your ability to go short, can be changed at short notice. 12. When you trade in a currency other than your base currency your profit or loss will be realised in that currency and will be booked to your account in that currency. As a default, we will automatically, and on a daily basis, convert any positive or negative balance on your account in a currency other than your base currency to your base currency. You may change this default at any time by calling us or via our PureDeal platform. 13. ASX Data Fees If you want to trade individual shares online we will deliver these price feeds to you in accordance with the following scale of charges: ASX Data Fees Client User Type Trades Per Month Cost Per Month Professional 4 or more Nil Less than 4 $45.00 Non-professional 4 or more Nil Less than 4 $37.50 Fees will be charged to your account for each calendar month in which you trade Australian shares less than four times. Opening and closing trades both count towards this total. 8
We reserve the right to remove your access to ASX prices if you do not have sufficient funds in your account to cover the data fees, and/or that your account may be left with a debit balance as a result of ongoing data fees. You can trade stock indices and our other instruments online without this access. Alternatively, we offer a 'delayed data' service, which provides you with a delayed price stream free of charge. The delayed data service provides a real-time quote on request. How to Trade CFDs CFDs are a flexible alternative to conventional trading. With IG Markets you get transparent pricing on all the markets we cover, including shares, indices and forex. The concept of CFD trading is simple. If you think a market is set to rise you buy at the top end of our quote (the offer price), or if you think the market will fall you sell at the bottom of our quote (the bid price). Your position is a contract: you never actually own the instrument you are buying. The important fact is that when you buy you want the price to go up, and when you sell you want the price to drop. Example: Buying Westpac Banking Corp It s March 2010 and Westpac is quoted in the market at $26.67/26.68. With IG Markets you can trade in either direction at the market bid-offer price. You decide to buy 1,000 shares as a CFD at $26.68, the offer price. Your initial outlay is just 5% x 1,000 shares x $26.68 = $1,334. The same outlay with a regular stockbroker would only give you exposure to the performance of 50 shares.* Our standard commission rate on this transaction is just 0.1% or $26.68 (1,000 shares x $26.68 x 0.1%) (see Contract Details). While your position remains open, your account is debited to reflect interest adjustments and credited to reflect any dividends. A week later, Westpac has climbed to $27.50/27.51 in the market and you decide to take your profit. You sell 1,000 shares at $27.50, the bid price. The commission on this transaction is 0.1% or $27.50 (1,000 shares x $27.50 x 0.1%). Your gross profit on the trade is calculated as follows: 9
Profit Closing level $27.50 Opening level $26.68 Difference $ 0.82 Profit: $0.82 x 1000 = $820 To calculate the overall result on the transaction you would also have to take into account the commission you have paid and the interest and dividend adjustments. The Detailed Example includes these charges and adjustments. *Please note that trading CFDs is a geared investment strategy, carrying a high risk to your capital. Only trade with money you can afford to lose. Please see our Risk Warning for more details. The PureDeal platform Trade CFDs at the market price using our browser-based PureDeal platform. PureDeal has a customisable interface which provides quick fire one-click dealing and full account management. Through PureDeal we also offer a full range of free trading tools and charting packages which provide up-to-the minute news and research to help your trading. The size of the trade which you place through PureDeal is entirely your choice, providing you meet the minimum size for that market. If you 'buy' at $5 per point, for example, this means you make $5 for every point the price goes up and lose $5 for every point it moves down. Refer to Contract Details. Learn about risk CFDs are a leveraged product, so it is important to understand the risks involved before beginning to trade. Find out more about about types of risk and how to manage them, or if you're ready to start trading CFDs now, you can open an account online in minutes. Risk Warning Before you apply to begin trading with us, you must carefully consider whether using CFDs is appropriate for you in the light of your circumstances and financial position. You should be aware that margin trading is a high risk geared investment strategy and we do not consider it suitable for many members of the public. You should not deal in CFDs unless you understand 10
the nature of the contract you are entering into and the extent of your exposure to risk from that contract. CFDs involve different levels of exposure to risk and, in deciding whether to trade in such instruments, you should be aware of the following points: Trading in CFDs carries a high degree of risk. The gearing or leverage involved in trading CFDs means that a small initial margin payment can potentially lead to large losses. The geared nature of CFDs also means that CFD trading can carry greater risks than conventional share trading, which is generally not geared. A relatively small market movement can lead to a proportionately much larger movement in the value of your investment, and this can work against you as well as for you. Most CFDs are off-exchange derivatives. This might be considered to involve greater risk than an on-exchange derivative as there is no exchange market on which to close out an open position you are only able to open and close your positions with us. Foreign markets will involve different risks to Australian markets. The potential for profit or loss from CFDs relating to a foreign market or denominated in a foreign currency will be affected by fluctuations in foreign exchange rates. It is possible to incur a loss if exchange rates change to your detriment, even if the price of the instrument to which the CFD relates remains unchanged. CFDs are contingent liability transactions which are margined and require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately, and they may only be settled in cash. You may sustain a total loss of the margin that you deposit with us to establish or maintain a position. If the market moves against you, you may be called upon to pay substantial additional margin at short notice. If you fail to do so within the required time, your position may be liquidated at a loss and you will be liable for any resulting deficit. You will be deemed to have received a notice requiring the payment of such funds, even if you are not at home or do not receive the messages we leave for you, if the notices are delivered to your nominated contact points. Even if a CFD is not margined, it may still carry an obligation to make further payments in certain circumstances over and above any amount paid when you entered into the contract. Under certain trading conditions it may be difficult or impossible to liquidate a position. This may occur, for example, at times of rapid price movement if the price rises or falls in one trading session to such an extent that trading in the underlying market is suspended or restricted. A Limited Risk CFD limits the extent of your liability, but you may sustain the loss in a relatively short time. Placing a Non-Guaranteed Stop Order will not necessarily limit your losses to the intended amounts, because market conditions may make it 11
impossible to execute such an Order if the underlying market moves straight through the stipulated price. We will not provide you with personal financial product advice relating to CFDs and we will not make CFD recommendations of any kind. The only advice we will give you will be as to how CFDs work. There is no clearing house for CFDs, and the performance of a CFD by IG MARKETS LTD is not guaranteed by an exchange or clearing house. Our insolvency or default may lead to your positions being liquidated or closed out without your consent. While in such circumstances any deposits lodged with us would be totally protected as they are held on trust, any unrealised profits may not be fully recovered and you would rank as an unsecured creditor of ours in relation to such unrealised profits. Although by dealing with us you will not be dealing in securities, you need to be aware that you may still be subject to the Corporations Act 2001 and, in particular, the market manipulation and insider trading provisions of the Act. The obligations to you under the Customer Agreement and the CFDs are unsecured obligations, meaning that you are an unsecured creditor of ours. Derivative markets are speculative and volatile Derivative markets can be highly volatile. The prices of CFDs and the underlying securities, currencies, commodities, financial instruments or indices may fluctuate rapidly and over wide ranges and in reflection of unforeseen events or changes in conditions, none of which can be controlled by you. The prices of CFDs will be influenced by unpredictable events including, amongst other things, changing supply and demand relationships, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and the prevailing psychological characteristics of the relevant marketplace. Your money is deposited in a separate trust account Any money that you deposit with us will be held separately from our money, in a trust account, and held and dealt with in accordance with the Governing Legislation and the Customer Agreement. As permitted under Governing Legislation, your money may be comingled into one or more trust accounts with our other customers money, which is also held on trust. 12
Currency risk Balances in currencies other than Australian dollars may be maintained by you on your account and, when requested by you and/or necessitated by your trading, conversions between currencies will be made at an exchange rate no more than 0.5% less favourable to you than the prevailing interbank mid-market spot rate at the time of the conversion. A crystallised profit or loss that is realised in a currency other than your base account currency will be converted daily unless requested otherwise by you. Different frequency options are available when opening an account and can be modified by you using the self service function on our Electronic Trading Service or by request to us. For example, if you open a CFD on the movement in price of IBM stock, it will be priced in US dollars. The deposit requirement for the CFD will be calculated in US dollars and you will be required to maintain the AUD equivalent as margin (assuming your account is denominated in AUD). Any variation in the AUD/USD exchange rate or the underlying CFD deposit calculation may alter the amount of Australian Dollars required to maintain the margin requirement. Any crystallised profit or loss on the CFD will calculated and posted in US dollars. Conversion of this profit or loss to AUD is subject to your preferences. You may choose to maintain your account in Australian dollars, US dollars or Sterling. Advice We will not give you any personal financial product advice. Any general financial product advice that we may give you will have been prepared without taking into account your personal objectives, financial situation or needs. Accordingly, you should consider carefully trading with us and the appropriateness of any general advice having regard to your personal objectives, financial situation and needs, and obtain financial and legal advice before you open an account and trade with us. Nothing in this PDS should be taken to be a recommendation to trade in CFDs or trade in any particular share, stock, index, commodity or currency by way of CFDs, and any reference to a particular share, stock, index, commodity or currency is for illustration only. The Customer Agreement contains a provision by which you agree that you enter into all CFDs in reliance on your own judgement, and that we will not be liable for any losses, costs, expenses or damages suffered by you arising from any inaccuracy or mistake in any information we give to you in the absence of fraud, wilful default or gross negligence or as required by legislation. 13
Tax Our understanding of the tax treatment of CFDs is set out in section 7. There is a risk that our understanding may be incorrect and/or that the tax treatment of these products may change. In the event that we are obliged to pay any tax in respect of your personal liability for CFDs undertaken with us, the Customer Agreement contains an indemnity that would allow us to recover such payments from you. Acknowledgments By signing the Application Form you acknowledge to us that you: have given consideration to your objectives, financial situation and needs and the risks of loss which accompany the prospects of profit associated with dealing in CFDs and have formed the opinion that dealing in CFDs is suitable for your purposes; were advised by us to obtain independent tax and financial advice concerning this PDS, including the Customer Agreement; received and considered this PDS, including the Customer Agreement. Going short of individual shares Going short of an individual share carries some additional risks that don t apply to clients who are long of individual shares. These risks include but are not limited to: forced buy-back due to changes in regulatory or stock-borrowing conditions; imposition of, and increase in, borrowing charges over the lifetime of the trade; and the obligation to take the other side of purchase opportunities (eg. rights issues) afforded to clients who are long of the same stock. This might result in the obligation to go further short at unfavourable market prices. In addition, you should be aware that corporate events affecting obligations of short sellers can often be announced at very short notice leaving no opportunity, or choice, to close positions out and avoid participation. What are the Risks? Trading CFDs is a flexible way to back your judgement on a range of financial markets. However, without an effective risk management strategy, it can also lead to substantial losses. It is therefore important to understand risk and learn how to manage your portfolio effectively. 14
Why do I need to manage risk? Leverage Unlike most traditional financial trading services, CFDs are a leveraged product. This means that your initial deposit payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker for example). Leverage is one of the key advantages of CFD trading, as it allows you to profit from a market without having to put up the full value of the position. However, this magnified exposure also means that CFDs can result in losses that exceed your initial deposit. How do I manage risk? Understand your market Before trading, it is important to understand the market on which you are taking a position. Knowing the potential for each market to experience volatility and establishing the likelihood of sharp price movements is essential when considering the risk associated with each trade. For example, historically, some markets are less likely to make sudden discontinuous jumps, while others, such as shares (which can be subject to profit warnings and other news), may be more likely to make abrupt movements. We offer regularly updated Economic Indicators, including analyses of upcoming financial announcements, as well as a market commentary to keep you up-to-date with major financial events. Enrolling in our TradeSense course will allow you to benefit from a full module on risk management, including information about how to maintain a balanced portfolio and manage your personal risk/reward expectations. We also offer a range of free, online seminars. Monitor your open positions An equally important risk management strategy is simply to closely monitor your open positions. Volatile markets can move hundreds of points in minutes, and while a good understanding of your market may help pre-empt extreme fluctuations, there is no substitute for actively monitoring your account. To help you manage risk without capping your potential for profit we offer a powerful range of tools. 15
Using Stop orders When you open a position, the most effective way to manage risk is to put an absolute cap on your potential loss by using a Guaranteed Stop. This means that you specify the level at which you want your position to be closed should the market move against you. In return for a one-off extra charge, in effect an insurance premium, we then guarantee to close your position at that exact point, even if the market gaps suddenly. With a Limited Risk position (a position with a Guaranteed Stop attached), your maximum possible loss is known as soon as you open the trade, making it an extremely effective risk management tool. We also offer non-guaranteed Stops, which do not incur the premium associated with Guaranteed Stops but can also help manage risk. A non-guaranteed Stop will trigger an order to close your position once the selected level has been reached. However, you should be aware that it will sometimes not be possible for the Stop Order to be transacted at the price you have selected. This may happen overnight or when the market moves very quickly. In these cases the Order will be transacted at a worse, and sometimes much worse, level than you have selected. This is known as 'slippage', and is determined on a basis which IG believes to be fair and reasonable. For more details on slippage see our CFD glossary. Trailing Stops are non-guaranteed, but track your position while the market moves in your favour, providing protection if it starts to move in the other direction. This allows you to lock in profits without the need frequently to re-adjust the level of your Stop. Read more about Trailing Stops. Using Limit orders A limit order triggers an order to close once a specified market level has been reached. It is an instruction to take profit if prices move in your favour. This means you can realise a preselected level of profit, even if the price later moves against you. Stop and Limit orders are available over the phone as well as online, meaning you can manage risk wherever you are. Risk and Account type The amount of risk you are willing to take may affect your choice of account. We offer two main accounts, the Limited Risk and the Trader Account. With a Limited Risk Account, a Guaranteed Stop is placed on every position you open and you can generally not lose more than the amount of your initial deposit. Please note however, if you place a trade denominated in a currency other than your base currency, you will be exposed to currency fluctuations. We may then convert any profits or losses in this currency 16
to your base currency. Due to the possibility of currency fluctuations, this could result in your account incurring a further loss, beyond your initial deposit. The Trader Account allows you to place trades with or without Limited Risk. If you open a position without a Guaranteed Stop and the market moves against you, you must have sufficient cash on your account to fund the deposit requirement as well as the total of your running losses. If you do not, we may cut back or close your open positions. If we choose to do so, this can help prevent your losses becoming more substantial. While this offers some level of risk protection, you should not rely on us to close your losing positions. The Select Account, which is not available to open online, does not require immediate margin payments. As such, if you are using this account type, it is important to monitor your positions closely. Find out more about the range of accounts we offer, and our TradeSense education programme, which allows you to begin trading in smaller than usual minimum deal sizes, so you can limit your exposure as you build your confidence.. Or, if you're ready to start trading CFDs now, you can open an account online in minutes. COMMON TYPES OF MARKET ORDERS An order in a market such as a stock market is an instruction from a customer to a broker or trading platform to buy or sell on the exchange. The most common orders used are market orders, limit orders, stop orders, stop loss orders and good till cancelled. Market order Market orders are a buy or sell order to be executed immediately at current market prices. As long as there are willing sellers and buyers, market orders are filled. Market orders are therefore used when certainty of execution is a priority. A market order is the simplest of the order types. This order type does not allow any control over the price received. The order is filled at the best price available at the relevant time. In fast-moving markets, the price paid or received may be quite different from the last price quoted before the order was entered. A market order may be split across multiple participants on the other side of the transaction, resulting in different prices received or paid for some of the shares. Limit order A limit order is an order to buy a security at not more, or sell at not less, than a specific price. This gives the trader control over the price at which the trade is executed; however, the 17
order may never be executed ("filled"). Limit orders are used when the trader wishes to control price rather than certainty of execution. A buy limit order can only be executed at the limit price or lower. For example, if an investor wants to buy a stock, but doesn't want to pay more than $20 for it, the investor can place a limit order to buy the stock at $20 "or better". By entering a limit order rather than a market order, the investor will not buy the stock at a higher price, but, may get less than he wants or not get the stock at all. A sell limit order is the reverse to a buy limit order and can only be executed at the limit price or higher. Stop orders A stop order (also stop loss order) is an order to buy (or sell) a security once the price of the security has climbed above (or dropped below) a specified stop price. (Note that both bid and ask prices can trigger a stop order.) When the specified stop price is reached, the stop order is entered as a market order (no limit). This means the trade will definitely be executed, but not necessarily at or near the stop price, particularly when the order is placed into a fast-moving market, or if there is insufficient liquidity available relative to the size of the order. [ A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order at $40. If the share price drops to $40, the broker sells the stock at the next available price. This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits. A buy stop order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an investor sells a stock short hoping for the stock price to go down so they can return the borrowed shares at a lower price (Covering) the investor may use a buy stop order to protect against losses if the price goes too high. It can also be used to advantage in a declining market when you want to enter a long position close to the bottom after turn-around. Good Till Cancelled A Good till cancelled order instructs your broker or trading platform to keep the order active until you cancel it. Obviously, you use this order with other order types to specify a time frame for the order. Conclusion You may find these orders called slightly different names at some brokers, but the concept will be the same. Other types of orders are good to know, but you may not use them often. 18