What are the types of orders on the Stock Exchange? Firstable, let me explain what are the motives for purchasing shares. People purchase shares in order to: preferably invest their capital (savings) based on the expected good dividends and growth in share prices – to preferably sell when rates rise, take control of the company. (It isn’t necessary to have the so-called famed controlling stake, ie. more than 50% of the shares in order to do this. In practice, it requires much less shares to control a company, and it’s achevied thanks to the large dispersion of shares between small shareholders. Large dispersion makes it difficult to organize opposition).
In many companies, shareholders can be divided into two groups. The first group is one whose members have such a large number of shares that they can affect the course of company’s management. These are so-called “influential” shareholders (general partners). A second group of shareholders are those holding a small number of shares that will not be enough to gain influence on the company. Such shareholders are referred to as “other”.
Shares’ trading is done on the stock exchange. Only entities authorized to do so may trade on the stock market. Client can’t personally buy and sell shares there. He hasn’t got a direct access to the stock exchange. The client has indirect access through a broker.
Client who wants to buy or sell shares shall report to the brokerage house (it may be a bank brokerage) and signs a contract. Therefore, with the intention of buy-sale of shares the customer must issue its own instruction regarding the transaction, ie, to formulate order. The order can be:
In limited order the client specifies a maximum price limit of purchase, if it’s a transaction of purchase. This price is to pursue a transaction at a rate less than or equal to the limit. It’s similar in case of the sale. The specified limit price is the minimum price. The transaction is to be effected at a price equal to or greater than the limit.
In unlimited order client does not provide his own prices. He uses then the formula of POTD – The price of the Day. This means that he’s willing to enter into a transaction by price, which will be determined during the trading session. These types of orders have priority of implementation on the stock market, because the customers had already agreed to the deal. Of course, the order contains the name of the asset, and the period of validity of the order in the form of a specific date such as “until further notice”.
The orders affect the stock market. Transfer of the ownership of shares occurs at the time of the transaction on the stock exchange. Broker informs the customer about the transaction and its exchange rate. Also informs what part of the order has been processed (whole or part). The acquisition and sale of shares is recorded on deposit accounts.
The purchase of shares makes buyer a shareholder. Being a shareholder means to be co-owner of a particular company in proportion to the number of purchased shares. The purchase of shares is the acquisition of all rights of a shareholder.
I mentioned the limited and unlimited orders. There are also other kinds of orders like AON – All or Nothing. This type of order emphasizes the scope of implementation. The order of this type is to be executed in its entirety or not at all. Another form of contract is C – Conditional. Such an order may be made in whole or in part, if the broker reports an additional offer after determining the rates of the session.
In the developed markets, there are many forms of orders, for example Stop-Loss-Order, Stop-Buy-Order, circa, On the Opening (at the opening of session, which is the first offer of the day), On the Close (at the time of closing the session), discretionary (broker determines time and the form of the transaction in its discretion). There are other kinds of orders at the stock market as well.
Seller and buyer can complete a transaction in shares directly (outside the stock exchange), ie. contacting and negotiating with each other. After determining the terms of the transaction, both counterparties have to go to a broker, who runs the escrow account of the seller and make finalization. Finalization is filing certificate of deposit by the seller and issuing a certificate of deposit to buyer.