Market order or the hunger games of stock trading
The previous parts of the post can be found at the links:
Part 1 - How is the share price formed on the stock exchange? We do it
Part 2 - Bid/Offer: The Yin and Yang of Stock Prices
So, let's continue. So why don't we ever see some orders in the order book?
Because such orders don't have a price, which means they can't be arranged in a book where all orders are sorted by price. This type of order is used by buyers or sellers who don't want to wait for a counter offer with a suitable price.
"But how can you buy or sell something without specifying a price?" - you ask. It turns out it's possible. When you put out an order without specifying a price, the order simply "eats up" the number of lots you need at the prices currently on the books. Such an order is called a "market order". We can say that the most "hungry" investors who want to satisfy their "hunger" right now use the market order. Remember yourself: when you really want, for example, a cake, you won't stand at the counter and wait for the seller to set the price you want, you'll just buy the cake at the price that's valid at the moment.
So, let's imagine that someone sent the following order to the exchange: "to sell FB stocks in the volume of 20 lots". Such an order will not appear in the book, but it will "eat" all bids within 20 lots, starting with the most expensive ones.
In our example, there were a total of 15 lots left in the book, so the following concluded trades will be printed in the tape:
FB $115 5 lots
FB $100 10 lots
What will happen to the remaining market order of 5 lots (20-15) that couldn't be filled? The exchange will cancel the order for this remainder, as there are no counter offers in the book.
So, let's review what we learned in the current series of posts:
- For each company, the exchange maintains its own order book for buying and selling stocks;
- A buy order is called a "bid";
- A sell order is called an "offer";
- The order must contain the ticker (abbreviated name of the stock), the direction of the transaction (buy or sell), the price per share and the volume in lots;
- The lot size is set by the exchange. It may be equal to 1 share, 100 shares or some other quantity;
- All orders in the book are called "limit orders";
- There is a special type of orders, which are called "market orders". They have the following parameters: ticker, trade direction, volume in lots, and have no "price" parameter.
- The intersection of buy and sell orders by price creates a trade;
- The volume and price of a trade depends on how much volume was "eaten" in the counter offer and at what price;
- The trade is recorded in the tape. Each company has its own tape.
By the way, our book became empty because all limit orders were filled and no new ones came in. As a result, we have a tape of three trades. The trades are recorded in the tape according to when they were made:
FB $110 20 lots
FB $115 5 lots
FB $100 10 lots
So, when you see a flashing stock price somewhere, like in the broker's app, know that it's the last trade in the tape as of the current second. Or if you hear that Tesla stock has reached $2,000 a share, that means that there's a $2,000-a-share deal imprinted in the Tesla tape.
To show how the stock price has changed over time, a chart is made based on the prices of the trades and when they were made. At its core, a chart is a demonstration of how the stock tape has changed over time.
Knowing how to read a price chart is a basic skill that you will use as you invest. I will tell you how to read charts at our next meeting.
Part 1 - How is the share price formed on the stock exchange? We do it
Part 2 - Bid/Offer: The Yin and Yang of Stock Prices
So, let's continue. So why don't we ever see some orders in the order book?
Because such orders don't have a price, which means they can't be arranged in a book where all orders are sorted by price. This type of order is used by buyers or sellers who don't want to wait for a counter offer with a suitable price.
"But how can you buy or sell something without specifying a price?" - you ask. It turns out it's possible. When you put out an order without specifying a price, the order simply "eats up" the number of lots you need at the prices currently on the books. Such an order is called a "market order". We can say that the most "hungry" investors who want to satisfy their "hunger" right now use the market order. Remember yourself: when you really want, for example, a cake, you won't stand at the counter and wait for the seller to set the price you want, you'll just buy the cake at the price that's valid at the moment.
So, let's imagine that someone sent the following order to the exchange: "to sell FB stocks in the volume of 20 lots". Such an order will not appear in the book, but it will "eat" all bids within 20 lots, starting with the most expensive ones.
In our example, there were a total of 15 lots left in the book, so the following concluded trades will be printed in the tape:
FB $115 5 lots
FB $100 10 lots
What will happen to the remaining market order of 5 lots (20-15) that couldn't be filled? The exchange will cancel the order for this remainder, as there are no counter offers in the book.
So, let's review what we learned in the current series of posts:
- For each company, the exchange maintains its own order book for buying and selling stocks;
- A buy order is called a "bid";
- A sell order is called an "offer";
- The order must contain the ticker (abbreviated name of the stock), the direction of the transaction (buy or sell), the price per share and the volume in lots;
- The lot size is set by the exchange. It may be equal to 1 share, 100 shares or some other quantity;
- All orders in the book are called "limit orders";
- There is a special type of orders, which are called "market orders". They have the following parameters: ticker, trade direction, volume in lots, and have no "price" parameter.
- The intersection of buy and sell orders by price creates a trade;
- The volume and price of a trade depends on how much volume was "eaten" in the counter offer and at what price;
- The trade is recorded in the tape. Each company has its own tape.
By the way, our book became empty because all limit orders were filled and no new ones came in. As a result, we have a tape of three trades. The trades are recorded in the tape according to when they were made:
FB $110 20 lots
FB $115 5 lots
FB $100 10 lots
So, when you see a flashing stock price somewhere, like in the broker's app, know that it's the last trade in the tape as of the current second. Or if you hear that Tesla stock has reached $2,000 a share, that means that there's a $2,000-a-share deal imprinted in the Tesla tape.
To show how the stock price has changed over time, a chart is made based on the prices of the trades and when they were made. At its core, a chart is a demonstration of how the stock tape has changed over time.
Knowing how to read a price chart is a basic skill that you will use as you invest. I will tell you how to read charts at our next meeting.
🏅Follow the Golden winner of TradingView Community Awards 2023:
tradingview.com/u/Be_Capy
📊For free access to the Fundamental Strength Indicator and Rainbow Indicator, please send me a message at TradingView or becapy@yahoo.com.
tradingview.com/u/Be_Capy
📊For free access to the Fundamental Strength Indicator and Rainbow Indicator, please send me a message at TradingView or becapy@yahoo.com.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.