Page 145 - CalcBus_Flipbook

CH 18] Calculating Business 18-9

Order Type What it is and why it is used

Market order: A request to buy or sell a stock as soon as possible (ASAP) at the best
available price. A market order is executed only if the stock reaches the
price set by the investor. Investors may want to sell if a stock drops to or
below a certain price. This is used to unload stock at any price.

Limit order: A request to buy or sell a stock only at a specific price or better. The seller
prefers to keep the stock if their sell price is not met.

Stop
(or stop-loss)
order: A market order that is executed only if the stock reaches a predetermined
price. This is used to sell a stock that drops to or below a predetermined
price.

Stop-limit
order: A combination of a stop order and a limit order: a limit order is executed if
the stock price drops to a predetermined price, but only if the stock can sell
at or above this price limit. Used when the investor wants to sell when a
stock drops to their predetermined price, but only if it can sell for a
minimum amount.

When a stock is sold at a price higher than what it cost the investor, there is a profit on
the sale and this profit is termed capital gain. Conversely, when the stock is sold for a price
lower than its cost price a capital loss is incurred. As with supply and demand, when
investors demand to buy a particular stock, the market price of that stock increases.
It is easily understood, in the secondary market, that the investor is the seller of stock,
and the buyer of the stock is another investor, and not the brokerage firm. The brokerage
firm provides a service of handling the trades, and their handling incurs a cost to the seller.
In this regard, the brokerage firm acts as a middle-man in the marketplace. All brokers
charge a fee, also referred to as a commission, for their services and the fees charged varies
among the various brokerage firms. Some charge a flat fee based on stock volume, value of
the order, or as a percentage of the transaction.
Fee options. Full service broker commissions typically are a percentage of the value of
a trade. Discounters range from $4 to $20 for a trade of 1,000 shares or less, regardless of
value, and may offer a number of options with varying fees. Online broker fees currently
range from $5 to $15 a trade. The Financial Industry Regulatory Authority (FINRA) says
investors should weigh options carefully before choosing a broker.
Some brokers offer investors choices of fees. One, for instance, charges $7.95 for an
online trade, $12.95 for one using an automated phone service and $32.95 for a
representative-assisted transaction. Another firm charges $9.95 for online trades in
accounts that have made more than 30 trades in 12 months, and $19.95 per trade for other
accounts. However, it's $35 for automated phone trades and on a sliding percentage scale
for representative-assisted trades.
Fees are applied to sales as well as to purchases of stock. In our examples the round lot
and odd lot pricing structures will be used. The odd lot price reported to the client by the
broker is the round lot price increased by the odd lot differential when stock has been
purchased. The round lot price is decreased by the odd lot differential of one-eighth of a
percent (⅛ %) of a point, or $0.125, when stock has been sold.

Example: An investor sold 340 shares of stock at the round lot price of $65.50 per
share. Determine the trade value of the stock.
Solution Algorithm:
$65.50 x 300 = $19,650.00 trade value of 300 shares
$65.50 — $0.125 = $65.375 odd lot selling price per share less fee
$65.375 x 40 = $2,615.00 trade value of 40 shares
$19,650 + $2,615.00 = $22,265.00 trade value of 340 shares

Taxes on Sale of Stock. Selling stocks can incur income tax liabilities for the stock 18
seller. These taxes are in addition to the commissions paid and may reduce the net proceeds
from the sale. These taxes on sales are levied against the income the sale generates and
have been enacted for federal income taxes, state income taxes and city income taxes. It is
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