Types of orders

The simplest method of buying stock is through the market order. This is an order to buy or
sell a stated amount of a security at the most advantageous price obtainable after the order
reaches the trading floor.

A limit (or limited) order is an order to buy or sell a stated amount of a security when it
reaches a specified price or a better one if it is obtainable after the order comes to the trading
floor. In the Amsterdam market, the device of the “middle price” is used: an investor who
gives a limit order before the opening will have it executed at the day's median level, or at a
price that is better than the limit, whichever is found to be more advantageous to the client.

There are other more specialized types of orders. A stop order or stop-loss order is an order
to purchase or sell a security after a designated price is reached or passed, when it then
becomes a market order. It differs from the limit order in that it is designed to protect the
customer from market reversals; the stop price is not necessarily the price at which the order
will be executed, particularly if the market is changing rapidly. This type of order does not
lend itself to the London jobbing system.

An important method of trading in stock is through the buying and selling of options. The
most common option contracts are puts and calls.

A put is a contract that permits the holder to deliver to the purchaser a specified number of
shares of stock at a fixed price within a designated period of time, say six months; a call
entitles him to buy shares from the seller within a given period. For example, a person who
buys a stock hoping to sell it later at a higher price may also buy a put as a hedge against a
fall in price. The put enables him to sell the stock at the price for which he bought it. If the
stock rises he need not use the option and loses only the price of its purchase. Option trading
is common in Brussels, Paris, London, and the United States.

In the early days of securities trading, stocks and bonds were often bought at private banking
houses in the same way that commodities might be purchased over the counter of a general
store. This was the origin of the term “over-the-counter.” It is used today to mean all
securities transactions that are handled outside the exchanges. Increasingly, this market is
being subjected to regulation. The extent and nature of the over-the-counter market varies
throughout the world. In the United Kingdom, there is no over-the-counter market as such. In
the Netherlands, transactions are illegal if they do not involve a member of the Amsterdam
exchange or one of its provincial branches as an intermediary, except with the permission of
the Ministry of Finance. On the Paris bourse, one post is provided for trading in unlisted
issues. In Belgium, the stock exchange committee organizes, at least once a month, public
sales of stocks that are not officially quoted. In Japan a second security section has been
introduced into the major exchanges to provide more effective trading procedures for over-
the-counter transactions.

In the United States, the over-the-counter market includes most federal, state, and municipal
issues as well as a large variety of corporate stocks and bonds. The National Quotation
Bureau, which compiles over-the-counter prices, has furnished quotations on approximately
26,000 over-the-counter stocks. In early 1971, a major development occurred with the
introduction of current, computerized quotations on a number of active stocks.
Transactions in the over-the-counter market are executed through a large number of broker-
dealers with a complex network of private wires and telephone lines. Their operations are
subject to the rules of the National Association of Securities Dealers, Inc., a self-regulating
body created in 1939. In 1964 the Congress extended to the larger over-the-counter
companies the same requirements as to periodic reporting, proxy solicitation, and insider
trading that are applied to dealers in listed stocks.

The over-the-counter market is a negotiated market, as distinguished from the auction

markets for listed securities. An investor desiring to trade an over-the-counter security gives
his order to a broker functioning as a retailer, who ordinarily shops among various firms to
obtain the best possible price.

Because of the difficulty that institutions often experience in disposing of large blocks of
listed securities on the exchanges, nonmember firms have set up over-the-counter markets in
these issues—principally in those listed on the New York Stock Exchange. Although such
transactions are conducted within the framework of the over-the-counter market, their prices
are tied to those on the Exchange. Accordingly, this form of trading has been labelled the
“third market.” There is now also a “fourth market,” consisting of direct transactions between
investors without an intermediary. This market also had its origins in the need of the
institutions to find ways of executing large transactions. Impetus to such direct dealings has
been given by the development of computerized systems to bring together large traders.

The structure of demand for securities

Interest in the ownership of securities has increased greatly in recent decades. Inflationary
tendencies have directed attention to stocks as a means of offsetting rising prices. Stock
exchanges have cultivated investors through public relations programs. Government
regulation has strengthened public confidence in stock trading procedures. Many
governments have given support to the capital markets in order to facilitate business
financing.

In the United States, in addition to the millions of individuals who own shares of publicly
held corporations, many others own shares indirectly through institutions that are large
holders of stock, such as investment companies and pension funds. It is difficult to obtain
figures for other countries. A major problem of developing countries has been the absence of
investors able and willing to buy shares. Many investors in these countries have preferred to
place their funds in tangible assets such as land.

Institutions such as insurance companies, mutual funds, pension funds, foundations, and
universities have grown very important in the security markets of the United States. Because
of their financial responsibilities to others, these institutions have characteristically followed
conservative investment policies stressing the purchase of fixed-income securities. The long-
term trend toward inflation, along with mounting stock prices, has led the institutions to look
more favourably upon common stocks.
Among the most rapidly growing institutions are the mutual funds. Technically, these are
known as open-end investment companies because the number of their shares outstanding
constantly changes as new shares are sold to investors and old ones redeemed.