Comparación entre el Direct Market Access y el Quoten Driven System (Market Maker)

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Trading Order Types

Market, Limit, Stop, and If-Touched

All trades are made up of separate orders that combine to make a complete trade. All trades consist of at least two orders: one person places an order to buy a security, while another places an order to sell that same security. Order types are the same whether trading stocks, currencies, or futures.

Traders have access to many different types of orders that they can use in various combinations to make trades. Below, the main order types are explained, along with some common ways they may be used in trading.

The Basics of Placing Orders

A single order is either a buy order or a sell order, and that will have to be specified regardless of the type of order being placed. Every order type detailed below can be used to buy and sell securities. Both buy orders and sell orders can be used either to enter or exit a trade. If a trade is entered with a buy order, then it will be exited with a sell order. If a trade is entered with a sell order, the position will be exited with a buy order.

For example, the simplest trade occurs when a trader expects a stock price to go up. That trader places one buy order to enter the trade, and one sell order to exit the trade. Hopefully, the stock price has increased in the time between those two orders, so the trader makes a profit when they sell.

Alternatively, if a trader expects a stock price to go down, they would place one sell order to enter the trade and one buy order to exit the trade. This is more commonly known as shorting or shorting a stock—the stock is sold first and then bought back later.

Market Orders (MKT)

Market orders buy or sell at the current price, whatever that price may be.   In an active market, market orders will execute immediately, but not necessarily at the exact price that the trader intended.

For example, a trader might place a market order to buy a stock when the best price is $129, but the order is for a popular stock that sees millions of shares exchange hands every day. In the seconds between the time an order is placed and the time it executes, the price has increased to $129.50. The trader who placed a market order will now pay more for the stock. When the price moves in an unfavorable direction after placing a market order, it’s called slippage.

Market orders are used when you want your order to be processed as quickly as possible, and you’re willing to risk getting a slightly different price. If you are buying, your market order will get filled at the ask price, as that is the price someone else is currently willing to sell for. If you are selling, your market order will get filled at the bid price, as that is the price someone else is currently willing to buy at.

Limit Orders (LMT)

Limit orders are orders to buy or sell an asset at a specific price or better.   You can think of limit orders as the opposite of market orders. Limit orders may or may not get filled, depending on how the market is moving and where a trader sets the limit price. However, if they do get filled, it will always be at the price a trader expects (or at a better price than expected). Limit orders are used when you want to make sure that you get a suitable price, and you’re willing to risk the order not being filled at all.

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«Better» depends on whether the order is a buy or sell order. For example, if a trader placed a limit buy order with a price of $50.50, the order would only get filled if the stock could be purchased for $50.50 or less. If your brokerage can’t find someone willing to sell to you for $50.50 or less, then the order won’t execute.

On the other hand, if you wanted to sell a stock for $50.50 or more, you would place a limit sell order and set the price at $50.50. The order will only be executed if someone else is willing to buy the stock from you for at least $50.50.

Stop Orders (STP)

Stop orders are similar to market orders—they are orders to buy or sell an asset at the best available price—but these orders are only processed if the market reaches a specific price.   That price is set in the opposite direction a trader hopes the stock will go, so this type of order is used as a way of limiting losses. That’s why you’ll often hear them referred to as «stop-loss orders.»

For a buy order, the stop price must be above the current price. For a sell order, the stop price must be below the current price.

For example, if you own a stock that’s currently worth $12.57, you might place a stop order to sell with a price of $12.50. If the stock price dips down to $12.50 or lower, your stop order becomes a market order to sell, and you’ll automatically sell the stock for the best price available at that moment. If the price doesn’t dip down to $12.50, then nothing happens.

Beginner traders may only place stop orders to sell, but once traders begin shorting stocks, that’s when stop orders to buy become useful. Traders who short a stock want the price to drop, but to protect themselves from a sudden spike in price, they may set a stop order to sell just above the price they shorted the stock at.

Remember, shorting a stock means selling it first, and then buying it later to close your position (hopefully after the price has fallen). A trader who shorts a stock at $50.75 may place a stop order to buy at $60. That way, they’ll automatically get out of a bad trade once they’ve lost $0.25 per share.

Stop-Limit Orders (STPLMT)

Traders will commonly combine a stop order and a limit order to fine-tune what price they get. Stop-limit orders work in the same way as stop orders, except they automatically become a limit order when the target price is hit, rather than a market order. 

Like a standard limit order, stop-limit orders ensure a specific price for a trader, but they won’t guarantee that the order executes.

When using a stop-limit order, the stop and limit prices of the order can be different. For example, a trader placing a stop-limit sell order can set the stop price at $50 and the limit price at $49.50. In this scenario, the stop-limit sell order would automatically become a limit order once the stock dropped to $50, but the trader’s shares won’t be sold unless they can secure a price of $49.50 or better.

Trailing Stop Orders

Both stop orders and stop-limit orders can be set at a specific price, or they can be set in relation to the market price. When a stop or stop-limit order fluctuates with the market price, that’s a trailing stop order (or trailing stop-limit order).   Traders use this strategy to protect their profits.

For example, a trader may buy a stock for $50. A week later, the stock price has risen to $53. That trader may set a trailing stop order to sell that’s set $2 below market price. If the stock price drops to $51 the next day, the trailing stop order will become a market order to sell, locking in some profit for the trader. However, if the stock price increases to $55 the next day, the trailing stop order trigger would increase to $53.

The trigger price for trailing stop orders can be determined by dollar amount or percentage, but it will always be relative to the market price.

Market-If-Touched (MIT) Orders

Market-if-touched orders are similar to limit orders, except they don’t guarantee a price. This helps them execute quicker, while still allowing investors to set target prices, rather than buying at the current market price. The trader sets a price, and if that price is hit, the MIT order will become a market order. 

For example, imagine a trader wants to buy a stock that’s currently worth $70, but they don’t want to pay that much. They may place an MIT buy order with a target price of $60. If the stock price falls to $60, the MIT order becomes a market order, and the trader will buy the stock.

As with a standard market order, there is a risk of slippage with MIT orders. MIT orders only give traders the ability to control the price at which a market order is triggered.

Limit-If-Touched (LIT) Orders

A limit-if-touched (LIT) order is like an MIT order, but it sends out a limit order instead of a market order.   LIT orders are different from standard limit orders because the trader can set both the trigger price and the limit price.

For example, assume a stock is trading at $16.50. A LIT buy order trigger could be placed at $16.40, and a limit price could be set at $16.35. If the price moves to $16.40 or below (the trigger price) then a limit order will be placed at $16.35. Since it is a limit order, shares will only be bought for $16.35 or less. If there isn’t anyone willing to sell you shares for $16.35 or less, then your buy order won’t execute, even though the LIT trigger price was reached.

The Bottom Line

A market order is used to enter or exit a position quickly. This is the quickest way to fill an order, but it gives you the least control over the price. A limit order, on the other hand, ensures minimum selling prices and maximum buying prices, but they won’t execute as quickly.

Stop orders are used to limit your losses with a market order when a trade turns against you. Stop-limit orders employ the same tactics, but they use limit orders instead of market orders. Trailing stop orders and trailing stop-limit orders use the same strategy to protect profits.

Market-if-touched orders trigger a market order if a certain price is touched. A limit-if-touched order sends out a limit order if a specific trigger price is reached.

Comparación entre el Direct Market Access y el Quoten Driven System (Market Maker)

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Money Market

What Is the Money Market?

The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers.

In any case, the money market is characterized by a high degree of safety and a relatively low return in interest.

Key Takeaways

  • The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper.
  • An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.
  • Money market investments are characterized by safety and liquidity, with money market fund shares targeted to $1.

Money Market

Understanding the Money Market

On the widest scale, the money market is one of the pillars of the global financial system and involves overnight swaps of vast amounts of money between banks and the U.S. government. An individual may invest in the money market by buying money market funds, short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills, among other examples.

Traders and institutions are more commonly the buyers for other money market products such as eurodollar deposits, banker’s acceptances, commercial paper, federal funds, and repurchase agreements. In all cases, they are low-risk investments that have maturities ranging from overnight to just under one year. That short life makes them almost as liquid as cash. That is, the principal is safe and the money is not inaccessible for long.

The money market also has retail locations. Your local bank is one retail location, and the U.S. government’s TreasuryDirect website is another. Your broker is yet another source. However, most money market transactions are wholesale, meaning they are for large denominations and take place between financial institutions and companies rather than individuals.

The money market is defined as dealing in debt of less than one year. The borrowers keep their cash flows steady, and the lenders make a modest profit.

Money Market Participants

Institutions that participate in the money market include banks that lend to one another and to large companies in the eurocurrency and time deposit markets; companies that raise money by selling commercial paper into the market, which can be bought by other companies or funds; and investors who purchase bank CDs as a safe place to park money in the short term. Some of those wholesale transactions eventually make their way into the hands of consumers as components of money market mutual funds and other investments.

The U.S. government issues Treasury bills in the money market, with maturities that range from a few days to one year. Primary dealers buy them in large amounts directly from the government to trade between themselves or to sell to individual investors. Individual investors can buy them directly from the government through its TreasuryDirect website or through a bank or a broker. State, county, and municipal governments also issue short-term notes.

In the wholesale market, commercial paper is a popular borrowing mechanism because the interest rates are higher than for bank time deposits or Treasury bills, and a greater range of maturities is available, from overnight to 270 days. However, the risk of default is significantly higher for commercial paper than for bank or government instruments.

Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase «break the buck,» meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money. However, this scenario only happens very rarely, but because many money market funds are not FDIC-insured, meaning that money market funds can nevertheless lose money.

Types of Money Market Instruments

Money Market Funds

The wholesale money market is limited to companies and financial institutions that lend and borrow in amounts ranging from $5 million to well over $1 billion per transaction. Mutual funds offer baskets of these products to individual investors. The net asset value (NAV) of such funds is intended to stay at $1. During the 2008 financial crisis, one fund fell below that level. That triggered market panic and a mass exodus from the funds, which ultimately led to additional restrictions on their access to riskier investments.

Money Market Accounts

Money market accounts are a type of savings account. They pay interest, but some issuers offer account holders limited rights to occasionally withdraw money or write checks against the account. (Withdrawals are limited by federal regulations. If they are exceeded, the bank promptly converts it to a checking account.) Banks typically calculate interest on a money market account on a daily basis and make a monthly credit to the account.

In general, money market accounts offer slightly higher interest rates than standard savings accounts. But the difference in rates between savings and money market accounts has narrowed considerably since the 2008 financial crisis. Average interest rates for money market accounts vary based on the amount deposited. As of mid-2020, the best-paying money market account with no minimum deposit offered 2.25% annualized interest. The best with a minimum deposit of $10,000 paid $2.45%.

Funds in money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) in credit unions.

Certificates of Deposit (CDs)

Most certificates of deposit (CDs) are not strictly money market funds because they are sold with terms of up to 10 years. However, CDs with terms as short as three months to six months are available.

As with money market accounts, bigger deposits and longer terms yield better interest rates. Rates in mid-2020 for six-month CDs ranged from about 0.02% to 0.65% depending on the size of the deposit. Unlike a money market account, the rates offered with a CD remain constant for the deposit period. There is a penalty associated with early withdrawal of funds deposited in a CD.

Commercial Paper

This is where we get into the professional market for institutions and traders who deal in large-volume transactions. The commercial paper market is for buying and selling unsecured loans for corporations in need of a short-term cash infusion. Only highly creditworthy companies participate, so the risks are low.

Banker’s Acceptances

Another professional money market trade, the banker’s acceptance is a short-term loan that is guaranteed by a bank. Used extensively in foreign trade, a banker’s acceptance is like a post-dated check and serves as a guarantee that an exporter can pay for the goods. There is a secondary market for buying and selling banker’s acceptances at a discount.

Eurodollars

These are not to be confused with the euro currency. Eurodollars are dollar-denominated deposits held in foreign banks and thus not subject to Federal Reserve regulations. Very large deposits of eurodollars are held in banks in the Cayman Islands and the Bahamas. Money market funds, foreign banks, and large corporations invest in them because they pay a slightly higher interest rate than U.S. government debt.

Repos

The repo, or repurchase agreement, is part of the overnight lending money market. Treasury bills or other government securities are sold to another party with an agreement to repurchase them at a set price on a set date.

Money Markets vs. Capital Markets

The money market is defined as dealing in debt of less than one year. It is a means for governments and corporations to keep their cash flow steady, and for investors to make a modest profit.

The capital market is dedicated to the sale and purchase of long-term debt and equity instruments. The term encompasses the entire stock and bond markets. Certainly, anyone can buy and sell a stock in a fraction of a second these days. However, the company issued the stock for the purpose of raising money for its long-term operations. Its value fluctuates but it has no expiration date unless the company itself ceases to operate.

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