Stop Orders and Order Book Basics

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Questions and Answers

What happens to the order to sell 10,000 shares at 204 cents when placed?

It receives price priority over the buy order at 206 cents.

It is immediately executed at the price of 209 cents.

It remains inactive until matched with a buyer.

It briefly appears in the order book and is coupled with existing buy orders. (correct)

What is the total volume of shares that brokers D and E purchased at 206 cents?

8,200 shares

10,000 shares

3,500 shares

5,000 shares (correct)

After executing the transactions, how many shares remain in the sell order at 204 cents?

None, as the order has been fully executed.

8,200 shares (correct)

1,600 shares

10,000 shares

Which brokers receive priority in purchasing shares from the order book?

Those wanting to buy at the highest price. Signup and view all the answers

What is the price at which the first 5,000 shares are sold after the execution of the transaction?

206 cents Signup and view all the answers

How many shares does the broker wanting to buy 10,000 shares at 204 eventually receive?

8,200 shares Signup and view all the answers

What is the new price for the highest buying order in the order book after the transactions?

206 cents Signup and view all the answers

Which order is fulfilled first according to price priority?

Buy order at 206 cents Signup and view all the answers

What is a stop order primarily used for in trading?

To buy or sell shares when a specified price is reached. Signup and view all the answers

When does a stop order become effective?

When the share price reaches the specified stop price. Signup and view all the answers

How does a stop limit order differ from a stop order?

It creates a limit order instead of a market order after the stop price is reached. Signup and view all the answers

What is the purpose of a stop-loss order?

To protect a trader from incurring further losses. Signup and view all the answers

What is the total transaction cost for Susan, the seller?

R351,86 Signup and view all the answers

If a person purchases a share at 500c and places a stop order at 580c, what is the intended outcome?

Sell the share if the price drops to 580c. Signup and view all the answers

What happens if the share price rises to 650c after placing a stop order at 580c?

The stop order will remain in effect until manually canceled. Signup and view all the answers

How much will Susan ultimately receive from the transaction after deducting costs?

R45 595,36 Signup and view all the answers

What is the value of the Securities Transfer Tax (STT) that Peter needs to pay?

R115,00 Signup and view all the answers

How can an automated trading program assist with stop orders?

It can monitor price movements and automatically place sell orders at a predetermined decline. Signup and view all the answers

If a trader sets a stop order at 480c after buying a share at 500c, what will happen if the price increases?

The stop order will not execute until the price drops to 480c. Signup and view all the answers

What is the combined total of the brokerage and the Strate settlement cost for Peter?

R351,86 Signup and view all the answers

What is the total value of the transaction for Peter, the purchaser, including costs?

R46 519,64 Signup and view all the answers

What characterizes an order as 'passive'?

It is unmatched and waiting for execution. Signup and view all the answers

In the order book, which order type has priority over others for execution?

Active orders with earlier entry time Signup and view all the answers

After the active order is matched, what happens to the volume of the selling order at 206?

It gets partially fulfilled due to matching. Signup and view all the answers

Which broker received priority when the order to sell at 206 was matched?

Broker D Signup and view all the answers

What will happen to any remaining shares that could not be matched from an active order?

They become a passive order until matched. Signup and view all the answers

How does the price/time priority work in an order book?

Higher-priced orders are filled first, following time priority. Signup and view all the answers

What does the term 'price/time priority' refer to?

Orders with the best price are filled before others, then by the time they were entered. Signup and view all the answers

What is indicated by an order that appears in the order book as 'active'?

It is pending execution and can be matched. Signup and view all the answers

What happens when a market order appears on the sell side of the order book?

The volume is added to the volume at the lowest price. Signup and view all the answers

How is the total executable volume determined for each price limit?

By taking the smallest of the cumulative buy and sell volumes at that price limit. Signup and view all the answers

Which price leads to the maximum executable auction volume as stated in the information?

9 450 Signup and view all the answers

When a market order is placed on the buy side of the order book, what occurs?

The volume is added to the volume at the highest price. Signup and view all the answers

What must occur for a transaction to be executed?

There must be a buy order for each sales order. Signup and view all the answers

What is the auction volume for the price limit of 9 450?

10 400 Signup and view all the answers

What is the significance of price increments in column 3 that do not appear in the order book?

They represent potential buy and sell transactions. Signup and view all the answers

How is the cumulative volume calculated at a specific price limit?

By adding together all volumes for each order at that limit. Signup and view all the answers

Study Notes

Stop Orders

A stop order is an order to buy or sell shares when the price of a share reaches a specified price level (stop price).
Once the stop price is reached, the order is entered into the order book and treated like a regular market order.
A stop limit order can also be used. Once the stop price is reached, the order will be entered in the order book and treated like a new limit order.
Stop orders protect profits or limit losses
For example, an investor purchases a share at 500c and the price increases to 600c. They can place a stop order to sell at 580c. If the price drops to 580c, the order is executed and the investor profits 80c per share.
Another example is a stop-loss order. An investor purchases a share at 500c and places a stop order to sell at 480c. if the price drops to 480c, the order is executed and the investor minimizes their losses.

Order Book

The order book shows pending buy and sell orders, organized by price and time.
The buy side shows the total volume of shares people are willing to buy at each price.
The sell side shows the total volume of shares people are willing to sell at each price.
Orders are executed based on price and time priority.
For example, if a broker places an order to sell 2 000 shares at 206c, the order is immediately matched with existing buy orders at 206c.
Brokers with orders placed earlier receive priority over those placed later at the same price.
When a new active order is placed, it receives price priority over existing passive orders. For example, if an order is placed to sell 10 000 shares at 204c, they will be executed before orders at 206c.
The order book can be rearranged to accommodate price increments that do not appear in the table.
Market orders, which are buy or sell orders at the best available price, are not entered as separate lines in the table. Instead they are added to the volume entered at the lowest price on the sell side or the highest price on the buy side.

Cumulative Volume and Auction Volume

Cumulative volume is the total volume of shares buy or sell orders at or above a specific price.
Auction volume is the total volume of shares that can be executed at a specific price.
Auction volume is determined by the smallest of the cumulative buy and sell volumes at a specific price.
The auction price is the price that results in the maximum auction volume.
For example, an auction price of 9 450c results in the maximum auction volume, so all orders entered during the auction process will be matched at 9 450c.

Transaction Costs (Susan & Peter Example)

Investors bear transaction costs, including brokerage fees, Strate settlement costs, Investor Protection Levy, VAT and Securities Transfer Tax (STT).
In the example of Susan and Peter, Susan receives R45 595,36 after deducting transaction costs, while Peter pays R46 519,64 after adding transaction costs.

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Description

This quiz covers the essentials of stop orders, including types and examples that explain how they protect profits and limit losses. Additionally, it discusses the order book and its role in tracking pending buy and sell orders. Test your knowledge on these fundamental trading concepts!