WHAT HAPPENS WHEN I PLACE A TRADE?

Nowadays there are a number of ways you can buy or sell a company; however, no matter how the trade is initiated, the ensuing sequence of events is the same.

Let’s say you are sitting at your computer and you want to buy 500 shares of Microsoft (MSFT).  What you have to do is to give instructions to your broker.  In this example, the instructions are being given electronically; however, if you called the broker or visited her office, the same information would be required.  Keep one thing in mind: in most cases, the firm you use is an "introducing broker": they take orders but don't execute them.  They're somewhat akin to a waiter or waitress: someone else does the cooking.

The following pieces of information will be required:

1. Is the order a buy or sell
2. Is the order a market, stop or limit order
3. What is the time limit: Good till canceled, Day only, immediate
4. How do you want the transaction to proceed?  Do you have a minimum quantity?  Do you want all or none?

You have to be able to respond to all these questions.

Buying or selling 

Answering the first question is easy: you know if you want to buy or sell.  The next question is a bit trickier.  If you select a market order, you’re telling the broker to buy the shares of Microsoft as soon as possible at whatever price they are trading.  Many people don’t want a market order, they prefer a limit order.  In other words, they like to specify the price.

Let’s say you got interested in Microsoft at $25 per share.  You have tracked the company looking it up in on MSN Moneycentral (appropriate) or Yahoo! Finance and you noticed that the share price has bounced around from $25 to $26 over the past few ways.  You have $25,000 lying around and you want to buy 1,000 shares at $25 per share.  You place a limit order.  You specify that you want the purchase to be made at $24.95 per share or lower.  If you’re selling shares and you place a limit order at $24.95, you are requesting that the order be executed at $24.95 per share or higher.  Buying low and selling high are generally good things!

Ok, so you have specified the company name (via a ticker symbol), you have stated you want to buy shares in the company; you have asked that the trade be a limit order at a price of $24.95 per share: next you have to specify the time limit.

Good til cancelled, fill or kill, day only and other options 

You have a number of choices here.  You can ask that the order be filled immediately (fill or kill).  An order is killed if it is halted before it can be confirmed or executed.  You can say that the order should be executed some time today (day only).  Finally, you can stipulate that order is “good till canceled.”  (GTC) An order that’s GTC will generally hang around for two to three months waiting for the price to come to your limit order.  When it hits the price, chances are it will execute.

I say “chances are” because there’s one more piece to the puzzle.  You have to let the broker know if you’re willing to let the trade be broken up into smaller pieces.  A lot is 100 shares.  Many trades are executed in multiples of round lots.  An odd lot is a number that isn’t evenly divisible by one hundred.  For example 62 shares is an odd lot as is 148.  The more shares you try to trade, the tougher it becomes to execute the event in one fell swoop.  As orders are placed, they are “queued up.”  Those at the head of the queue have the right to be executed first.

All or nothing 

If your order to buy 1000 shares at $24.95 is set up as AON, all or none, it gets the lowest priority, since it has to sell in its entirety or not at all.  I fyou're facing acceptably priced sell orders in the queue that ask for trades of 100 shares, 400 shares, 300 shares, 10,000 shares, it might be tough to match things up.  In most cases, it is never a problem.  So stipulating “all or none” (AON) doesn’t present a difficulty for liquid companies.  If you don’t do this, the order might execute in segments.  You might see the 500 be filled in three events: 200 shares, 100 shares and 200 shares.  It's not a big deal, because as long as these trades execute in a single trading day, you'll still only incur one commission.

Let’s say you wanted to buy 6,000 shares of a company that has an average daily volume of 100,000 shares.  You might want to specify a minimum quantity of 1,000, 2,000 or 3,000 shares.  This scenario could happen when you place a GTC limit order for 6,000 shares—all or none—that never executes, even if the limit price is reached repeatedly.  Maybe the orders just can’t be matched up.

By the way, this hypothetical queue of orders doesn’t wait until the order at the head is executed.  If a match between buy and sell cannot be achieved, the next order in the queue is examined.  There’s a certain supermarket I know that should invoke that policy at their deli counter!
Generally speaking, a market order with no stipulation on the number of shares has the best chance of executing.  If you place a limit order with a minimum quantity or all or none, then making it good till canceled will likely increase the probability that the trade is executed.

If your limit order for 500 shares of Microsoft is executed, you’re now an owner of the company.  If you so request, you will be issued a stock certificate.  You will then become a shareholder of record.  Often, a brokerage company requires payment of a small fee for issuance of a stock certificate—the fee is around $25, but it depends upon the brokerage company policy.  If you decide to become a shareholder of record, this fact is recorded by a person called the transfer agent.  The transfer agent keeps records for the company.  If you elect not to receive the stock certificate, then the certificate (actually an electronic certificate nowadays) is held by the broker and the shares are held in street name.  The broker in some respects acts as the transfer agent and keeps track of who owns what.  If the company wants to talk to the shareholders—announce a stock split, issue a report—this action is carried out through the broker.  In street name, you still own those shares, but they’re held by the broker for you.

It goes without saying that Microsoft is presented here an an example.  The company is used for descriptive and not prescriptive purposes!