Definition
Execution is the process of completing a buy or sell order for a security. It occurs when the order is filled, meaning that the trade has been completed in the market. The order is submitted by the investor to a broker, who determines how to execute the trade while adhering to the conditions placed by the client.
Execution vs Order Placement
| Execution |
Order Placement |
| Completion of the order |
Submission of the order |
| Occurs when filled |
Marks the initiation of the order |
| Managed by the broker |
Controlled by the investor |
| Involves price, volume, and timing |
Involves the decision to buy or sell |
1. Bid Price
Definition: The highest price a buyer is willing to pay for a security. The bid price is essential for execution because orders are often matched based on this price.
2. Ask Price
Definition: The lowest price a seller is willing to accept for a security. The ask price plays a significant role in determining whether an order will get executed.
3. Market Order
Definition: An order to buy or sell a security immediately at the current market price. It guarantees execution but not the price.
4. Limit Order
Definition: An order to buy or sell a security at a specific price or better. Execution is not guaranteed; it will only be performed at the limit price or beyond.
graph TD;
A[Investor Places Order] --> B[Broker Receives Order];
B --> C{Order Type?};
C -->|Market Order| D[Executes Immediately];
C -->|Limit Order| E[Places Order in the Market];
E --> F{Market Conditions};
F -->|Conditions Met| D;
F -->|Conditions Not Met| G[Order Pending];
D --> H[Confirmation of Execution];
Fun Facts and Quotes
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“In trading and investing, it’s not what you buy that matters, but when you buy it.” - Anonymous
(Or when it gets executed!)
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Did you know? Execution times can affect overall trading costs. According to research, a delay of just one minute in execution could lead to an unfavorable price change!
Frequently Asked Questions
Q: What factors can affect the execution of an order?
A: Several factors can affect execution, including market volatility, the size of the order, and the type of order placed.
Q: Can I cancel an order after it has been placed?
A: Yes, you can cancel an order, but it’s essential to do so before it gets executed.
Q: What does ‘order filled’ mean?
A: ‘Order filled’ means that your buy or sell order has been completed in the marketplace.
References for Further Reading
- Investopedia on Execution
- “The Intelligent Investor” by Benjamin Graham
- “A Random Walk Down Wall Street” by Burton G. Malkiel
Test Your Knowledge: Execution Quiz
## What does execution refer to in trading?
- [x] Completion of a buy or sell order
- [ ] The process of placing an order
- [ ] Calculating profit from the trades
- [ ] None of the above
> **Explanation:** Execution refers specifically to when a buy or sell order is fulfilled in the marketplace.
## When does an order become executed?
- [ ] When the investor places the order
- [ ] When the broker receives the order
- [x] When the order is filled
- [ ] When the market closes
> **Explanation:** An order is considered executed when it is filled, not simply when it is submitted or received.
## What type of order guarantees execution but not the price?
- [x] Market order
- [ ] Limit order
- [ ] Stop-loss order
- [ ] All of the above
> **Explanation:** A market order guarantees that the order will be executed right away at the current market price but does not guarantee a specific price.
## An investor places an order with a specific price point. What kind of order is this?
- [ ] Market order
- [x] Limit order
- [ ] Stop order
- [ ] Open order
> **Explanation:** A limit order allows the investor to specify the price at which they want to buy or sell the security.
## What happens if market conditions do not meet the criteria of a limit order?
- [x] The order stays pending
- [ ] The order gets executed at market price
- [ ] The order is canceled automatically
- [ ] The broker purchases the security anyway
> **Explanation:** If market conditions do not meet a limit order's criteria, the order remains open and pending until conditions are favorable.
## Is it legal for brokers to manipulate order execution?
- [ ] Yes, often
- [x] No, it's against regulations
- [ ] Only sometimes
- [ ] Depends on the broker
> **Explanation:** It's against the law for brokers to manipulate the execution of orders; they must find the best means to execute.
## Can orders be executed after market hours?
- [ ] Yes, for all types
- [ ] No, never
- [x] Yes, for some types during extended hours
- [ ] Only for limit orders
> **Explanation:** Some orders can indeed be executed after hours during specific market conditions, particularly in extended trading sessions.
## What do brokers seek to find for their clients in terms of execution?
- [x] The best possible means to execute trades
- [ ] The most complicated methods
- [ ] The fastest methods at all costs
- [ ] A minimum of execution
> **Explanation:** Brokers are obligated by law to locate the best means for executing their clients' trades, emphasizing the quality of execution.
## What do you call the highest price a buyer is willing to pay in a market?
- [x] Bid price
- [ ] Ask price
- [ ] Market price
- [ ] Limit price
> **Explanation:** The bid price denotes the maximum price that a buyer is ready to pay, playing a crucial role in trade execution.
## In what form is a market order executed?
- [x] Market conditions
- [ ] Bid conditions
- [ ] Limit conditions
- [ ] Price conditions
> **Explanation:** A market order executes based on the current market conditions, regardless of price fluctuations.
Thank you for diving into the intriguing world of Execution in trading! Remember, it’s all about timing… and a dash of luck (or skill 😉). Until next time, happy trading!
