Describe the differences among the following three types of orders: market, limit, and stop loss. Provide examples of each in your own words.
Market order entails buying or selling the stock at the best available current price ensuring immediate sale without price guarantee. For example, a trader seeking to sell or buy stock will place a market order using the current market price provided the market is open at the time of placing the order. On the contrary, a limit order requires the investor to buy or sell stock at a particular minimum or maximum price, hence its execution is not immediate since a certain price must be paid (Schwab, 2021). If a trader seeks to buy the stock at a certain price say $ 133 he will place a limit order so that he buys a stock only when the price offered is $ 133 or less. A Stop-loss order is an order to buy or sell stock at the current market price after it has traded for some time. For example, a stop-loss order can be used by the trader to protect against losing the capital gain on his stock by requiring it to be sold at a certain price if it starts falling.
What is a short sale? Provide an example in your own words
A short sale can be said to be the act of selling the property by the homeowner at a price less than the outstanding mortgage amount owed to the lender. The buyer of the home is not the lender but a person outside the mortgage agreement (Chen, 2021). For example, a homeowner may be having an outstanding mortgage balance of $ 230,000 but instead sells the property at $ 150,000 to pay the lender with the financier foregoing the balance of $ 80,000. The sale of the property at $ 150,000 is a Short sale.
Describe buying on margin. Provide an example in your own words
Buying on margin occurs when an investor buys securities by borrowing money from a broker or financial institution to get the outstanding balance to make the purchase. The money loaned is thus secured with the purchased stock (Tracy, 2020). For example, Clinton wants to buy stock valued at $ 20,000 from Whitehouse Limited. He has savings of $ 5,000 in his account which is not enough to buy the stock. Thus, to get the remaining $15,000, he will borrow either from a bank or broker to finance the purchase. This is what is meant by buying on margin.
Why is it illegal to trade on insider information? Provide an example in your own words
Insider trading entails people who have access to privileged information about the company using it to buy the company stock. Such information is usually not disclosed to the general public (Hall, 2020). Trading based on such information is illegal since it is fraud and will attract hefty fines as well as jail terms. For example, the chief executive officer of the company together with other senior managers may manipulate the financial statements to reflect the loss in the operation of the company scaring away potential investors. As a result, the company’s stocks will fall making them use proxy to buy the company’s stock then the company revert to profitability.
References
Chen, J., (2021). Short Sale. (Real Estate). https://www.investopedia.com/terms/r/real-estate-short-sale.asp
Hall, M., (2020). What Is Insider Trading and Is It Illegal? https://www.investopedia.com/ask/answers/what-exactly-is-insider-trading/
Schwab, C., (2021). 3 Order Types: Market, Limit and Stop Orders. https://www.schwab.com/resource-center/insights/content/3-order-types-market-limit-and-stop-orders
Tracy, P., (2020). Buying on Margin. https://investinganswers.com/dictionary/b/buying-margin
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