When To Use And How To Place A Market Order (MKT)

A market orders (MKT) simply tells your broker to buy or sell at the current market price. This is the most common order and it is used when you want to get the order executed immediately at the "market price". So this is preferable in fast market conditions or when you want to ensure that a position is taken and to protect against missing an opportunity. The broker will attempt to buy or sell the security at the current market price, whatever that price whatever that price may be. In an active market, market orders will always get filled, but not necessarily at the exact price that the trader intended. For example, a trader might place a market order when the best price is 30.00, but other orders might get filled first, and the trader's order might get filled at 30.01 instead. Market orders are used when you definitely want your order to be processed, and are willing to risk getting a slightly different price.

THERE IS NO SPECIFIED PRICE FOR THE MARKET ORDER

Example: Price of a stock ABC is: bid 30.00 ask 30.01

You place a market order, and it should be executed at the best ask, in this case it is 30.01. But, using a market order we instruct our broker that to us, it is more important that trade is executed, that at what price! As a result, our order can be executed at different price, for example at 30.02, because of a time lag between the moment we sent the orders and when it got to the exchange. But as a result, our order will definitely be executed.

Good thing about this type of order is that if you are in a loosing position  and want to close it immediately at whatever price is offered, then this is a type of order for you, because you will always get executed.

Bad part is the fact that if you use this type of order in illiquid stocks (or ETFs, futures etc), then your trade might be executed at worst price than the one you have expected.

How To Buy Or Sell Stocks Using Execution Only And Discount Brokers?

An execution only stockbroker such as discount broker offers to only execute your orders at the market but without giving you an advice to buy or sell a specific stock. He buys and sells shares on the instructions of clients but who offers no advice about what to buy and sell. Self-directed investors who want to make their own decisions are most suited to this service, and will probably be attracted by the lower dealing costs. So you as an investor take all responsibility for investment decisions. You give the instructions to buy or sell a stock by telephone or online, on a stock brokerage website or by using their software. So discount brokers:

• Do business over the phone or on the Internet by using their web site or software

• Because of low overheads, such as support a research department or spending time with their clients, they can charge lower commissions.

• You will pay less than if you trade with a full service broker.

• Discount brokers also offer no-load mutual funds with no transaction fee.

• Deep discount brokers charge a minimum commission of at least $5 up to $15

It is important to make sure that you know all the charges upfront. Execution only brokers may also require a minimum level of activity for an account or they charge a minimum fee (inactivity fee). So it is important to now how many trades you will make a month or a year, and choose a broker based on that.

WHAT DO I NEED TO DO BEFORE I CAN BUY SOME STOCKS:

To be able to buy/sell stocks, you have to choose a brokerage and sign up with them. You have to decide what is the best brokerage to use for trading. Sometimes it is one with lowest commission, but sometimes there are other important factors such as: interest paid on unused balance of your money in your brokerage account, interest charged for used margin in trading, maintenance inactivity fees, friendly using trading platform, trading platform monthly fee, wire transfer in/out if you live outside of US etc.

Before you can start trading, you have to fund it first! To fund the trading account, most executing only (discount) brokerages allow funding via cheque, account transfer and bill payment from any online banking account or by wire transfer. After the account is open and funded, you will get a username and password to log in in to the trading platform or on a web site, and you will be able to buy or sell stocks in the supported markets.

HOW TO OPEN A BROKERAGE ACCOUNT

Opening a brokerage account is very similar to opening a bank account with some additional information required. There is also likely to be a minimum investment required which could be as low as $500 or $1,000 for cash account and $2,000 for a margin account. So you have several types of accounts to choose when opening an account:

• Single Account: Only one individual person is allowed to trade.

• Joint Account: Two individual persons can trade

• Cash Account: When you buy a stock (or ETFs) you have to pay 100% within a three days. This is the most common type of all accounts. If you don’t have the cash, you can buy the stocks.

• Margin Account: Using this type of account you can borrow money from your brokerage account to purchase a security, for which they charge interest. You have to put up a minimum of 50% or more, with a $2,000 minimum to open an account. Rules for margin accounts are set by FINRA (http://www.finra.org/index.htm). If the price of a security declines by a certain amount, generally by 30%, then the broker will ask you to come up with the cash immediately by selling other securities to make up the amount or cash. 

Margin accounts can be very dangerous, especially in a declining or volatile market. For example, SP500 index is the most secure instrument of all stocks, and has the lowest volatility compared to individual stocks which is also known as the "beta". If you bought it in October 2007, before crisis began, your highest loss at any moment would be at 02 Mart 2009 when SP500 fall from 1562 in October 2007 to 756. Percentage loss in index was around 53%! So, if you have used all margin available in your account, you would got a margin call, and all your positions would be sold. On the other hand, if you bought right stocks, and they had an advance in price of 50%, your profits would be 100% on your original investment because of your leverage. It all depends how leveraged is used.

What Does A Full Service Brokers Do?

A stock broker or a broker is an intermediary between buyer and seller who helps them to make a transaction. Brokers are the people who handle customer orders to buy and sell securities. They are the ones who enable the trade to be completed.
If there were no brokers, then we would have to find a counter party for a trade, and that would mean to wait for months sometimes, like in a pink sheet stocks. Also, if the price that the other party offered was lower then we wanted to sell at, than we would have to wait for another buyer.

So, we have a middlemen. That is a stock brokerage company. To make a living and provide their service, they charge a fee. That fee is usually charged on a "per trade" basis. So if you buy a stock today and sell it tomorrow, you pay commission two times. 

These three main types of stock brokers are:

• Full service brokers or advisory stockbrokers
• Execution only brokers
• Discount brokers

In recent years, there a variations of discount brokers, such as: deep discount brokers and direct access brokers.

WHAT IS A FULL SERVICE BROKER AND WHAT AN ADVISORY STOCK BROKER?

Full service broker or an advisory stockbroker offer a service where broker who act as a financial advisor, discusses or reviews the investments of a client on a regular basis or when client requires, and he build a portfolio for him. The client makes the final decision to buy or sell. The adviser will supply research materials relating to markets, sectors and individual firms, and knowing individual needs of a client, such as his age, risk tolerance etc. The stockbroker will also make a specific recommendation for what stock are good to buy at the moment.

The relationship between a broker and a client will grow close over time. It is vital that both sides have clear guidelines as to how to work, and laying these principles down should be the role of the advisory management stockbroker. The client will almost certainly need a reasonable understanding of asset allocation and portfolio management techniques, or at least, importance of these in maintaining a client’s portfolio.

The costs associated with this type of brokers are highest of all. If you do not use an advisory management brokers, who charge up to $500 per trade, but use full service brokers, they will charge you from $30-50 per trade they execute for you, and they will give you advices about companies worth investing in, but they will not plan and maintain your portfolio, like an advisory management brokers will. Other costs include:

• Fees for transferring assets both into and out of an account
• Account maintenance fees
• Inactivity fees
• Interest on margin loans
• Sales charges on certain securities (such as loads on mutual funds)
• Fees for not maintaining a minimum balance

The biggest benefit for someone without experience is the opportunity to have a reputable firm guide you through the process of buying and selling stocks. Although it is highly probable that the fees will cut into your returns, you may be better off in the long run because a good broker can hold help you to overcome recession, and help you to avoid mistakes such as selling at market bottoms or buying during speculative bubbles.

CONCLUSION

If you have no idea about stock market and need someone to hold your hand while investing, and on the other hand are prepared to pay for it, I say go for full service brokers. On the other hand, if you understand importance of keeping your overheads as low as possible, see you in the next post about the executuion only brokers.