Overview
This lecture covered types of stock and option transactions, order types, and how to use stops and limits to manage risk and execute trading strategies. Key distinctions between opening/closing positions, market vs. limit orders, and stop/stop-limit uses were emphasized for exam success.
Position Types & Transactions
- Two main stock positions: long (buying/owning) and short (selling borrowed securities).
- Opening purchase: used to establish/add to a long position.
- Opening sale: used to establish/add to a short position.
- Closing sale: eliminates/reduces a long position.
- Closing purchase: eliminates/reduces a short position.
- "Eliminate or reduce" signals a closing transaction.
Order Types & Placement
- Only two true order types: market and limit.
- Market order: instant execution at best available price, no conditions.
- Limit order: executes at a specified price or better; price is more important than execution speed.
- Buy limit orders are placed below the current market price.
- Sell limit orders are placed above the current market price.
- Use "slobs over bliss" mnemonic: Sell Limits and Buy Stops (above), Buy Limits and Sell Stops (below market).
Stop & Stop-Limit Orders
- Stop orders activate to become market or limit orders if a trigger price is reached.
- Sell stop: placed below current market to protect against losses in long stock or establish short positions.
- Buy stop: placed above current market to protect short positions or buy on breakout.
- Stop-limit orders add a second condition, making execution less likely but at specified prices.
- Stops can be used to stop losses, protect profits, or establish positions.
Order Execution Scenarios
- Trigger price must be met before stop/stop-limit orders become active.
- Market orders guarantee execution; limit and stop-limit orders may not.
- More contingencies on an order decrease the likelihood of execution.
Equivalent & Alternative Strategies
- Selling puts can substitute for buy limit orders as a way to potentially acquire stocks at a lower net price.
- Buying puts provides downside protection for long positions; buying calls protects short positions.
Special Order Qualifiers & Discretion
- Additional qualifiers: fill or kill (all now or none), immediate or cancel (partial now, rest canceled), all or none (willing to wait for full order).
- Discretionary orders require broker authority if deciding action, asset, or amount ("Three As").
- Market not held orders do not require discretionary authority if the Three As are specified.
Key Terms & Definitions
- Long Position — Owning the security, profiting from price increases.
- Short Position — Selling borrowed security, profiting from price decreases.
- Market Order — Buy/sell immediately at the best available price.
- Limit Order — Buy/sell only at a specific price or better.
- Stop Order — Order becomes a market order when trigger price is hit.
- Stop-Limit Order — Order becomes a limit order when trigger price is hit.
- Slobs over Bliss — Mnemonic for order placement in relation to market price.
- Discretionary Authority — Permission for broker to decide action, asset, or amount in a client’s account.
Action Items / Next Steps
- Review the "slobs over bliss" mnemonic and order placement rules.
- Practice identifying order types and triggers in exam scenarios.
- Prepare for next lecture on debt securities as scheduled.