Glossary of terms
An order or trade order is a client’s instruction to their brokerage firm to buy or sell a financial asset on their behalf.Orders are usually placed through an online [trading platform] such as CFI’s [MetaTrader 5] trading platform.
The two major types of orders that every investor should familiarise themselves with are the market order and the limit order.Market Order
A market order is a request a trader sends to their broker to instruct them to execute a trade at that exact moment at the best possible price.Market orders are usually executed in seconds or even milli-seconds, providing there is a liquid market at the given moment the order has been placed. When a market order has been completed, it is known as a ‘filled order’.Limit Orders
A limit order is another order type traders must be familiar with before starting to trade on a live account. This type of order is sometimes also referred to as a pending order which allows traders to buy and sell financial assets at a fixed price in the future.For example, if you decide to buy gold at $1,700, you could enter a limit order for this amount. This means that you would not pay a more than $1,700 for that particular asset. Bear in mind, that it is still possible for you to buy the asset for less than the $1,700if you wish to do so.Digging deeper there are four types of limit orders:
- Buy Limit: an order sent from a trader to their broker to purchase an asset at or below a fixed price. For limit orders to be affective the need to be placed on the correct side of the market to be beneficial. Meaning in this case, placing the order at or below the current market price.
- Sell Limit: an order sent from a trader to their broker to sell an asset at or above a fixed price. To ensure a positive outcome, the order must be placed at or above the current market bid price.
- Buy Stop: an order sent from a trader to their broker to buy an asset at a price above the current market bid price. A stop order to buy becomes active after the stop level(the specified price level)has been reached. Buy stop are orders placed above the market and sell stop orders are placed below the market. Once a stop level has been reached, the order will be converted to a market or limit order.
- Sell Stop: an order sent from a trader to their broker to sell an asset at a price below the current market ask. Like the buy stop, a stop order to sell becomes active only after a particular price level has been reached.
- An order is a request from a trader to a broker to buy or sell an asset on behalf of the trader. The two major types of orders that every investor should familiarise themselves with are the market order and the limit order.
- The advantage of using market orders is that you are guaranteed to get the trade filled.
OTC trading also known as over-the-counter trading or off exchange trading,describes a transaction that is not conducted via a formal exchange. OTC trading creates plenty of opportunities for traders to partake in the Forex, commodities, indices, and equities market although it does carry a higher amount of risk than traditional investing which you should be aware of. OTC trades are executed via a dealer network and involve two separate parties.
The most common OTC market is the foreign exchange (forex or FX) market, where currencies are traded 24 hours a day, 5 days a week via a network of banks and brokerages, instead of on traditional exchanges. The OTC market is known to be a decentralised exchange and therefore has no single physical location and functions over proprietary electronic trading systems, email, and telephone.
OTC trading can also include stocks, derivatives, and commodities.Example of Over the Counter (OTC) Trading
While there are some similarities, there are plenty of differences when you compare the OTC market with exchange trading. On a more traditional exchange, like the New York Stock Exchange for example, you will see multiple buy and sell prices from various different parties. However, with OTC trading you will carefully choose one broker who you believe will offer you the best all round trading conditions and go with the buy and sell prices they provide.Key Takeaways
- OTC trading is more flexible than compared to more standardised and regulated exchanges.
- OTC trading increases financial market liquidity, as companies that cannot trade on the formal exchanges gain the opportunity for exposure.
- OTC trades have greater flexibility but are also considered more risky.