Types of orders

The simplest method of buying stock is through the market order. This is an order to buy or sell a stated amount of a security at the most advantageous price obtainable after the order reaches the trading floor. A limit (or limited) order is an order to buy or sell a stated amount of a security when it reaches a specified price or a better one if it is obtainable after the order comes to the trading floor. In the Amsterdam market, the device of the “middle price” is used: an investor who gives a limit order before the opening will have it executed at the day’s median level, or at a price that is better than the limit, whichever is found to be more advantageous to the client.

There are other more specialized types of orders. A stop order or stop-loss order is an order to purchase or sell a security after a designated price is reached or passed, when it then becomes a market order. It differs from the limit order in that it is designed to protect the customer from market reversals; the stop price is not necessarily the price at which the order will be executed, particularly if the market is changing rapidly. This type of order does not lend itself to the London jobbing system.

An important method of trading in stock is through the buying and selling of options. The most common option contracts are puts and calls. A put is a contract that permits the holder to deliver to the purchaser a specified number of shares of stock at a fixed price within a designated period of time, say six months; a call entitles him to buy shares from the seller within a given period. For example, a person who buys a stock hoping to sell it later at a higher price may also buy a put as a hedge against a fall in price. The put enables him to sell the stock at the price for which he bought it. If the stock rises he need not use the option and loses only the price of its purchase. Option trading is common in Brussels, Paris, London, and the United States.

In the early days of securities trading, stocks and bonds were often bought at private banking houses in the same way that commodities might be purchased over the counter of a general store. This was the origin of the term “over-the-counter.” It is used today to mean all securities transactions that are handled outside the exchanges. Increasingly, this market is being subjected to regulation. The extent and nature of the over-the-counter market varies throughout the world. In the United Kingdom, there is no over-the-counter market as such. In the Netherlands, transactions are illegal if they do not involve a member of the Amsterdam exchange or one of its provincial branches as an intermediary, except with the permission of the Ministry of Finance. On the Paris bourse, one post is provided for trading in unlisted issues. In Belgium, the stock exchange committee organizes, at least once a month, public sales of stocks that are not officially quoted. In Japan a second security section has been introduced into the major exchanges to provide more effective trading procedures for over-the-counter transactions.

In the United States, the over-the-counter market includes most federal, state, and municipal issues as well as a large variety of corporate stocks and bonds. The National Quotation Bureau, which compiles over-the-counter prices, has furnished quotations on approximately 26,000 over-the-counter stocks. In early 1971, a major development occurred with the introduction of current, computerized quotations on a number of active stocks.

Transactions in the over-the-counter market are executed through a large number of broker-dealers with a complex network of private wires and telephone lines. Their operations are subject to the rules of the National Association of Securities Dealers, Inc., a self-regulating body created in 1939. In 1964 the Congress extended to the larger over-the-counter companies the same requirements as to periodic reporting, proxy solicitation, and insider trading that are applied to dealers in listed stocks.

The over-the-counter market is a negotiated market, as distinguished from the auction markets for listed securities. An investor desiring to trade an over-the-counter security gives his order to a broker functioning as a retailer, who ordinarily shops among various firms to obtain the best possible price.

Because of the difficulty that institutions often experience in disposing of large blocks of listed securities on the exchanges, nonmember firms have set up over-the-counter markets in these issues—principally in those listed on the New York Stock Exchange. Although such transactions are conducted within the framework of the over-the-counter market, their prices are tied to those on the Exchange. Accordingly, this form of trading has been labelled the “third market.” There is now also a “fourth market,” consisting of direct transactions between investors without an intermediary. This market also had its origins in the need of the institutions to find ways of executing large transactions. Impetus to such direct dealings has been given by the development of computerized systems to bring together large traders.