Types of Orders

Customers who want to buy or sell securities can enter several types of orders.

1. Market orders - executed immediately at the market price;
2. Limit orders - set a limit on the amount paid or received for the securities;
3. Stop orders - become market orders if the stock reaches the stop price (or the trigger price if the order is a stop limit order);
4. Stop limit orders - entered as stop orders and changed to limit orders if the stock hits the trigger price;
5. Day orders - expire if not filled by the end of the day;
6. Good-till-canceled orders - do not expire until filled or canceled;
7. At-the-opening and market-on-close orders - executed at the opening of trading the day after the order is placed or as close as possible to the close of trading on the day the order is placed;
8. Reducing orders - automatically drop in price under certain conditions;
9. Fill or kill orders - must be executed immediately in full or in part; any part of the order that remains unfilled will be canceled;
10. All or none orders - must be executed in full, but not immediately;

An order that is sent immediately to the floor for execution without restrictions or limits is known as a market order. It is executed immediately at the current market price, and it has priority over all other types of orders. A market order to buy is executed at the lowest offering price available; a market order to sell is executed at the highest bid price available. As long as the security is trading, a market order guarantees execution. No other type of order offers that guarantee.

An order on which a customer has placed a limit on the acceptable purchase or selling price is called a limit order. Limit orders are usually not executed immediately (unless the price is right). A sell order at a limit sets a minimum price at which the customer is willing to sell the stock. The customer will gladly accept a higher price than the limit, but not a lower one. A limit order to buy sets a maximum purchase price. The customer prefers to buy at the lowest possible price, but will under no circumstances pay more than the limit price.

Executing a limit order:

The commission broker takes a limit order to the floor and presents it to the trading crowd, hoping to get a price better than the limit. Even though there is a specific price on the limit order, it must be executed at the most advantageous price for the customer. Limit orders, therefore, can be executed only at the specified price or better. If the order cannot be executed at the market, the commission house broker leaves the order with the specialist, who writes the trade down in the specialist's order book and watches the market for that price. Almost without exception, limit orders are left with the specialist so that they can be executed if and when price conditions meet the order limitation.

Risks and disadvantages of limit orders

Customers who enter limit orders risk missing the chance to buy or sell, especially if the market moves rapidly away from the limit. The market may never go as low as the buy limit price or as high as the sell limit price. The customer accepts the risk in exchange for extra control. (This cannot occur with a market order because it is executed at the current market price.) Sometimes limit orders are not executed, even if the limit price is met. There are two possible explanations for this.

1. Stock ahead. When there are limit orders on the specialist's book for the same price, they are arranged according to when they were received. If a limit order at a specific price was not filled, chances are that another order at the same price took precedence; that is, there was stock ahead.
2. Plus (up) tick. Limit orders to sell short may be executed only on a plus tick or a zero-plus tick. This means that even if you see a sale on the NYSE Tape at your price, your limit order to sell short might not be executed because a plus tick did not occur.

A stop order (also known as a stop loss order) is a trading tool designed to protect a profit or prevent further loss if the stock begins to move in the wrong direction. The stop order becomes a market order once the stock trades at or moves through a certain price, known as the stop price. Stop orders are usually left with and executed by the specialist. There is no guarantee that the executed price will be as favorable as the stop price. In this way, a stop order differs from a limit order, which does guarantee execution at the limit price or better. In effect, a stop order is a way of saying "Stop the market; I want to get off (or on)." The stop price triggers (or elects) the order, which is then normally entered as a market order.

A stop order takes two trades to execute:

1. Trigger. The trigger transaction activates the trade (the trigger transaction must be at or through the stop price).
2. Execution. The execution transaction completes the trade (the stop order has become a market order and is executed at the best market price).

Buy stop order. A buy stop order is always entered at a price above the current offering price and is triggered when the market price touches or goes through the buy stop price. Why would an investor instruct his registered representative to place a stop order to "Buy 100 COD at 42 1/4 stop" when the market is at 40?

When COD breaks through the resistance level of 42 (a bullish event), the investor believes it will keep going up and hopes to buy at 42 1/4 and ride the stock up. Until then, his money is not tied up.

Sell stop order. If the market is at 40, a customer who purchased the stock originally for $20 a share might call with a stop order to sell at 37 3/4. In essence, this order says "If the stock breaks through its support level of 38 ( a bearish event), I think it will keep going down. At that point, I want out."

Buy stop orders are usually made to limit the risk of short sales. Sell stop orders are made (1) to protect a profit - for example, a stock bought at 35 goes to 45; a sell stop order is entered at 42; and (2) to stop losses - for example, a stock bought at 45 goes to 40; a sell stop order is placed at 38. A sell stop is also called a stop loss. It makes sense, then, that a bullish buy stop order will be placed above the market and a bearish sell stop will be placed below the market.

What if the market really gets away on a stop? The following example illustrates what could happen. Assume the market is at 40 and a buy stop is placed at 43. First the stop is triggered as the stock passes through 43. The market starts to rise rapidly, and a purchase is executed at 52. Then the market goes down and stays there for months.
When a large number of stop orders on the specialist's book are triggered, a flurry of trading activity may take place as they become market orders. This activity may accelerate the advance or decline of the stock price. Consequently, the original intention of a stop order (to curtail a loss or protect a profit) is sabotaged. Such surprises may be avoided if a limit is placed on the stop order.

A stop limit order is a stop order that, after being triggered, becomes a limit order rather than a market order. For example, an order that reads "Sell 100 COD at 52 stop, 51 1/2 limit" means that the stop will be activated at or below 52. Ordinarily, the order then becomes a market order, and shares are sold at the next available price. However, because there is a 51 1/2 limit, the order to sell cannot be executed at less than 51 1/2. In essence, the investor is saying "If the stock price goes down, I'd like to get out; but if it goes too far, I'd just as soon hang on until it comes around again."

Again, the execution takes the following order. First the stop is triggered. Then the trade is treated like any other limit order that must be executed at the limit price or better. The buy stop, buy stop limit and sell limit orders are entered at or above the current market price. The buy limit, sell stop and sell stop limit orders are entered below the current market place, as shown in Figure 7.4

Reducing Orders

Certain orders on the specialist's book are reduced when a stock goes ex-dividend, and these are detailed in the following paragraphs.

All orders entered below the market are reduced on the ex-date - that is, the first date on which the new owner of stock does not qualify for the next dividend. On the ex-date, the price of the stock drops by the amount of the distribution. Orders reduced include buy limits, sell stops and sell stop limits. Without this reduction, trading at the lower price on the ex-dividend date could cause execution. This is illustrated in the following chart: Dividend
Value
Reduction
(Equiv. Fraction)
Order Price
Less Reduction
Order Price
After Reduction
$.20
$.25 (1/4)
35 1/8 - 1/4
= 34 7/8
$.52
$.62 1/2 (5/8)
35 1/8 - 5/8
= 34 1/2
$.02
$.12 1/2 (1/8)
35 1/8 - 1/8
= 35

The stop or limit price is reduced by the next greatest increment of trading; that is, the amount of the dividend is rounded to the next highest 1/8th.

Do not reduce orders may be entered by a customer. A DNRO will not be reduced by an ordinary cash dividend only. It will be reduced for other distributions, such as after a stock dividend or when a stock trades ex-rights.

Up tick rule. The up tick for the short sale rule (short sales are covered in the next section) carries overnight. In the event of a reduction resulting from a distribution, the prior close is adjusted. For example, the stock closes on an up tick at 49 and opens ex-dividend the next day with a 1/4-point reduction (to 48 3/4). A customer could short the next morning at 48 3/4. This is a zero-plus tick. If the stock closes at a minus tick or zero-minus tick, the price the next morning must be 1/8th of a point higher than the reduced price of 48 3/4 for a short sale to be executed.

Reductions for stock splits (proportional reductions). To calculate the reduction in the price of an open buy order or an open stock order after a stock split, divide the market price by the fraction that represents the split. For example, if a buy stop order has been entered for a stock at $100 and a 5-for-4 stock split has been announced, the $100 order price is divided by the fraction 5/4 to find the adjusted order price of $80.

Calculating Order Adjustments for Stock Splits
Order price: $100
Stock split: 5 for 4
5/4 = 1.25
$100 + 5/4 = $80
Adjusted order price = $80
Order price: $100
Stock split: 2 for 1
2/1 = 2.00
$100 + 2/1 = $50
Adjusted order price = $50
Order price: $100
Stock split: 3 for 2
3/2 = 1.50
$100 + 3/2 = $66.67
Adjusted order price = $66.625 (66 5/8)

If a calculation results in a price that cannot be converted exactly into 1/8ths, the order price is rounded down to the nearest 1/8th.

Day orders

Unless marked to the contrary, an order is assumed to be a day order, valid only until the close of trading on the day it is entered by the customer. If the order has not been filled, it will be canceled at the close of the day's trading. Investors should wait until the end of the day to change day orders to GTC orders or they will lose their place for the rest of the day (although if the order doesn't reach the post in time it will be canceled).

Good-till-canceled (GTC) orders

GTC orders, or open orders, are valid until executed or canceled. However, even these orders have a specific lifetime. Regardless of the day the orders are entered, the specialist will cancel them on the last business day of April or October (that is, every six months) unless the customer renews them at the time (individual firms may clear out GTC orders as frequently as monthly). This clears the specialist's books of obsolete orders and reduces the risk of executing trades that customers have forgotten.

A GTC order that has been properly renewed or confirmed retains its original position on the specialist's book. If a GTC order is not renewed or confirmed at the appropriate time, it is canceled and must be re-entered as a new order.

At the opening and market on close orders

At the opening orders are executed at the opening of the market. Partial executions are allowable. They can be either market or limit orders, but must reach the post by the open of trading in that security. Market on close orders are executed at (or as near as possible to ) the closing. If an at the opening or market at close order does not reach the post in time, the order is canceled.

EMPIRE FINANCIAL GROUP DOES NOT ACCEPT NOT HELD ORDERS.

Fill or kill (FOK) orders

The commission house broker is instructed to fill the entire FOK order immediately at the limit price or better. A broker who cannot fill the entire order immediately cancels it and notifies the originating branch office. The commission house order will not leave the order with the specialist.

Immediate or cancel (IOC) orders

These limit orders are like FOK orders except that a partial execution is acceptable. The portion not executed is canceled.

All or none (AON) orders

These orders have to be executed in their entirety or not at all. AON orders can be day or GTC orders. They differ from the FOK's in that they do not have to be filled immediately.

PENNY STOCKS

This page is designed to provide you, the beginning investor, with general information about penny stocks and the markets in which they are traded. Because there is so much fraud involving penny stocks, this booklet serves mostly to warn potential investors against becoming involved with penny stocks. However, you should be aware that many small, deserving, completely legitimate companies issue stock that trades for pennies a share in the over-the-counter market. The trick is to be able to spot the potential fraud. We hope this page will help you do just that.

What are penny stocks?

There is no set, accepted definition of penny stock. Some people define it as stock priced under one dollar, some under five dollars. Some people include only those securities traded in the "pink sheets," some include the entire OTC market. The Securities Division considers a stock to be a "penny stock" if it trades at or under $5.00 per share and trades in either the "pink sheets" or on NASDAQ. In addition, a true penny stock will have less than $4 million in net tangible assets and will not have a significant operating history. (In other words, if a company has real assets, such as equipment and inventory, and is engaged in some real business, such as manufacturing, then the Division does not consider the stock to be penny stock even though the shares are low-priced.)

The "OTC" market

Penny stocks are not traded on a stock exchange, but are traded in the over-the-counter (OTC) market. Part of the OTC market is the National Market System (NMS) of the NASDAQ (National Association of Securities Dealers Automated Quotation) System, which does not include any penny stocks.

There are also non-NMS NASDAQ securities, including some penny stocks. The NASDAQ system has listing standards that change from time to time and, depending on the standards, there may be more or fewer penny stocks on NASDAQ. If you purchase a low-priced security that is listed on NASDAQ, it will meet certain minimum standards. In addition, many NASDAQ prices are quoted regularly in newspapers, allowing you to follow the price of your security instead of forcing you to rely on your broker for all price information.

The third major component of the OTC market is the National Quotation Bureau's (NQB) service, commonly referred to as the "pink sheets." The NQB's securities lists and price information, printed on pads of long, narrow sheets of pink paper, have, for all practical purposes, no meaningful listing standards, and price information is sometimes difficult, if not impossible, for the small investor to obtain. Broker-dealers obtain their price information by calling the trading desks of three "market makers." Obviously, small investors do not have access to those traders and must rely on their stockbroker for accurate price information.

Principal/Agency

In most securities transactions, your broker-dealer acts as your agent, arranging a transaction directly between you and a third party. In compensation for arranging that trade, you pay your broker-dealer a commission. In some instances, the broker-dealer has the security you seek to purchase in inventory, or wants the security you wish to sell. The broker-dealer may trade with you on its own behalf, as a principal in the transaction. When the broker-dealer acts as a principal, and not as an agent, the trade confirmation should say that on its face. The broker-dealer is not paid a commission in principal trades, but makes its money on the spread, and by buying and selling at advantageous times, the same as any other investor. A sizeable portion of penny stock trades are principal transactions, and an investor should be alert to the potential conflicts of such transactions.

Bid/Ask

Penny stocks do not each have a single price at which they are bought and sold, but a number of different prices. The first difference is between the bid price and the ask price. The bid price is how much someone is willing to pay for the security, or the price at which you could sell your shares. The ask price is how much someone will sell their securities for, or how much you will have to pay. The difference between the prices is the spread.

The spread

To most investors, the spread represents a built-in loss at the time of investment. For example, if you purchased a stock that traded at 1/2 cent bid, 1 cent ask, the bid would have to more than double in price for you to break even (the "more than double" comes from additional costs such as "ticket" charges and other miscellaneous costs). Many investors buy penny stocks believing that "trading at 12" cents" means that they can buy and sell at 12" cents. This simply is not the case, and any salesperson who uses such a phrase is only telling half of the truth. The spreads in penny stocks are most commonly 25-33%, are often 50-100% and sometimes are over 100%.

Another factor to keep in mind when evaluating price information about penny stocks is that there are two "bid" and two "ask" prices, the inside and outside bid and ask. As a general rule, the price you will be interested in will be the outside bid and ask, or the lower bid and the higher ask, as those are the bid and ask prices to public customers.

Mark-ups

The last pricing factor concerning penny stocks is called the mark-up. A broker-dealer who has held the security in its account and subject to the risk of market price fluctuation, may mark the price of the security it sells to you up by a certain percentage, on top of the spread. This is to compensate broker-dealers for maintaining inventory sufficient to supply demand for an orderly and liquid market. What it means to the average investor is another cost that creates a built-in loss at the time of investment. In other words, the instant your transaction is effected, your securities are worth less than you paid for them.

Although it is no guarantee of a good price, you are more likely to get a better price in an agency transaction using a broker-dealer that has no interest in the transaction, due to the pricing factors above. In the typical penny stock transaction, the broker-dealer buys from its customers at the bid and sells at the ask, capturing as compensation the spread, plus any mark-up.

Market makers

A market maker is a broker-dealer who stands ready to buy or sell 100 shares of the stocks in which it makes a market. When a transaction is proposed, the market maker will give a price at which it would be willing to effect that transaction. The market maker's price applies only to the first 100 shares. While the market maker system has been widely criticized (after all, how much of a commitment is it to buy 100 shares at a penny apiece?) the system does offer investors some level of fairness. The more market makers there are in a given stock, the more likely they are to bid against each other, and the price will more likely move to a true "market" price. The names of the market makers of securities traded in the pink sheets are listed in the pink sheets.

Manipulation

Especially when there are few or only one market maker, penny stocks are susceptible to price manipulation. A common and easy manipulation is for a broker-dealer to gather a large holding of a penny stock at a very low price. Through the use of high-pressure sales techniques, the sales force of the broker-dealer hypes the stock and stirs up demand, which seemingly justifies the continual rise in prices given by the broker-dealer (which is probably also the only market maker).

The price continues to rise until there are no more investors who will buy, and then the bottom falls out and the price plummets. Sometimes the broker-dealer will buy back the securities at the fallen prices to recapture the stockpile for a future revival of the stock; more often investors are simply left holding the worthless stock.

Initial public offerings

The price and market discussion above relate to penny stocks already trading in the market. Stocks are introduced into the market through an initial public offering (IPO). In most cases, an IPO would need to be registered with the Securities Division, which applies a set of guidelines to the offering to determine whether the offering is "fair, just and equitable." Although the "merit" system of applying those guidelines is not foolproof, fraudulent offerings are rejected and not granted registration. For this reason, Missourians are not usually victims of penny stock scams in an IPO, but lose their money in the secondary market. In the secondary market, there are broad exemptions in the law that allow many penny stocks to trade in Missouri without meeting the merit standards.

Legitimate penny stocks

Despite all of the problems with penny stocks and the millions of dollars of loss involved with them, there are legitimate companies whose securities trade in the pink sheets at very low prices. Struggling young companies just starting out are perfect examples. Investment in such a company, held through the company's formative years, can pay off well. Such an astute investment requires three things: the ability to choose the right company, the capital to invest and hold the investment, and luck.

In order to choose the right company, you must know something about the business in which the company engages. You must be able to evaluate the feasibility of the company's business plan and the company's ability to compete in its field of endeavor. You must be able to evaluate the ability of the company's management to run the company. Finally, you must be able to evaluate the capitalization and cash flow of the company. If you find the right company, you must be able to hold the investment for years to allow the company to mature and for the stock to appreciate in value. Investment in "growth" companies is long-term investment. Furthermore, you must have sufficient capital to be able to withstand total loss of your investment. Investment in emerging companies is always a high-risk investment.

Finally, there is simply an element of luck in any stock investment. Luck plays an even greater role in a market in which manipulation is so prevalent. Some legitimate companies have had their stocks manipulated to such an extent that they were forced out of business. Even without manipulation, the success or failure of a fledgling business is simply unpredictable.

Sources of information

Your broker can be a tremendous help in evaluating an investment. However, in the penny stock area, there are many unscrupulous brokers whose only goal is to sell. Be sure that the advice you receive is balanced and addresses your investment needs. When in doubt, avoid a penny stock investment, especially if your broker "specializes" in penny stocks.

The prospectus is the most comprehensive source information about an IPO. It sets out where your investment money will be used, describes the capitalization, history and management of the company and describes the cash flow system of the company. If you need help interpreting the information you find in the prospectus, the Division has another pamphlet in this series entitled "How to Read a Prospectus."

Trade confirmations contain a wealth of information. The confirmation will show basic information, such as number of shares, but will also indicate whether the transaction was agency or principal, was solicited or unsolicited (it will say "unsolicited" if you called your broker to place the order without your broker having tried in any way to get you to place the order) and, in the case of most pink sheet and non-NMS NASDAQ trades, provide the bid and ask at the time of execution of the transaction.

Manuals such as Moody's and Standard and Poor's have current financial information about companies, and most penny stocks are listed in the manuals.

Periodic reports filed with the U.S. Securities and Exchange Commission have updated information about companies that register with the SEC. The most common report is a "10-K."

Warning signs

Watch for the following warning signs to alert you to a possible penny stock fraud:

High-pressure sales techniques. Investment in a legitimate emerging company is long-term. A good little company is not going to skyrocket in a couple of weeks. Building a sound company takes years; you have a few days or weeks to decide whether the investment is right for you.

Blind pools and blank checks. Do not invest in any security without being told exactly how your money will be spent. Be sure you know which properties the company plans to buy with the offering proceeds and how much money is to be spent on management and promoters.

Mismarked trade confirmations or new account cards. Be very wary if your trade confirmation is marked "unsolicited" if your broker did, in fact, solicit the trade. While it may be a simple mistake, unscrupulous penny stock brokers often mark the confirmation as unsolicited to avoid the registration laws and the "fair, just and equitable" standard. Watch for misstatements about your net worth, income and account objectives as well. Investing in penny stocks is speculative business and involves a high degree of risk. Often, brokers will enhance the new account card to make it seem that you are suitable for a penny stock investment when you are not.

Unauthorized transactions. Be alert to placement in your account of securities you did not agree to purchase. In some instances, a broker may try to pressure you into purchasing the stock, claiming that since you have the stock, you must pay for it. In some cases, the broker is temporarily "parking" the securities in your account, perhaps to meet the minimum distribution of an IPO, or for any number of reasons. In some cases, an unauthorized trade is simply a mistake, but in any case, complain immediately, both verbally and in writing to your broker, your broker's manager and to the Securities Division.