Chapter 18 - Placing And Executing Your Order

The argument for investing in marketable securities, and particularly in common stocks, has been pretty well established in the earlier pages of this book. America is a growing nation; and one of the best ways in which to share in this growth is by ownership of good common stocks. Long-term stockholders in such companies as Minnesota Mining, American Electric Power, Hartford Fire Insurance, Hanover Bank, General Electric, General Motors, American Express, Eli Lilly, McGraw Hill, etc., have enjoyed a steady rise in earnings, dividends, and market value of their holdings. A sound program of common stock investment, over time, has provided for retirements, offset inflation and, in many instances, built fortunes. So, of course you should invest! To do that you have to place orders.

Mechanics of the Stock Exchange

Let us see what actually happens when you place an order for a "listed" stock. We'll assume U. S. Steel common is selling at around 80 and you want to buy 100 shares. First you have to have an account with a brokerage firm. How do you do this? It's easy. You just fill out a couple of cards establishing your solvency, your residence, your business or professional status (if any), your character, and your capacity and intention to pay for such securities as you may order. You will be asked for a bank reference.

Now you're ready to begin. You may either know a customer's broker (official name "Registered Representative" ) in the brokerage house you have selected; or you may have one assigned to you. He will want to know your personal requirements and ideas about investing. He will provide you with desired information, give you quotes, and execute your orders. He will open your account as a cash, joint (usually man and wife), or a margin account.

Now to place that order for U. S. Steel common you may write your broker, or phone in your order. Most brokerage business is actually done on the phone. Assume you phone your customer's broker about your order for "Big Steel." He reports it is quoted, "80 bid offered at 80¼," with the last sale at 80⅛ You want to pay no more than 80; so you instruct the broker to buy 100 shares for you at that price. Then what happens?

In New York, the order is phoned to a clerk who transmits it to a broker on the floor of the New York Stock Exchange.

This Exchange is a huge building at the corner of Wall and Broad Streets. The trading room looks like Yankee Stadium, with a lot of telephone booths around the edges; the floor area is dotted with 18 trading posts. At some one of these horseshoe-shaped posts trade each of the 1200 stock issues listed on the New York Stock Exchange. Seventy-five different stocks are traded regularly at, or in the area of, each trading post.

When your order for 100 shares of U. S. Steel is phoned to the clerk, he, in due course, transfers it to the floor broker. Your order is on its way. Either the firm's own floor broker, or a broker acting for the firm, will then approach the "post" where "Big Steel" trades. He may find the stock quoted 80⅛-80¼. Obviously your order will not be filled on that basis. But the broker, in any event, will record your order to buy 100 shares @ 80. He waits. In due course, the market dips and you get your stock. Then what happens? Your transaction is immediately reported by the broker to the clerk, who reports it back to your brokerage firm. And the transaction appears on the ticker tape. You have bought 100 shares of U. S. Steel common @ 80 plus the Stock Exchange Commission of $47.

Then what happens? Your broker will, that day, mail out a confirmation that you have bought 100 shares of U. S. Steel common at 80 plus commission. You have five days in which to deliver your payment; and, at the time you send in your check, you may transmit instructions about transfer of the stock into your name. You will note, in all this, that commissions on stock trades are quite reasonable (they average about 1% of total market price); and the whole transaction is swiftly and effortlessly performed. This is the way any order on the New York Stock Exchange or American Stock Exchange works.

Unlisted Execution of Orders

Suppose however, that what you wanted to buy was 100 shares of American Express at 55? These shares are not listed on any exchange and therefore are traded over-the-counter. How would this order be executed? The quotation is, let us say, 54 bid, offered at 55¼. This "spread" is given in the "pink" sheets, for over-the-counter issues published daily by National Quotation Bureau. How then does your broker proceed?

He will have his unlisted trading department call at least two of the firms listed in the "pink sheets," who trade "American Express." First the trader may say: "Your market, please." The trader may then say: "I have an order to buy 100 American Express at 55." One trader phoned, may have stock at 55; and he will fill your order. So again you buy; but this time, over-the-counter. It's not important to you. You want to buy good stocks at the right price; and you care little whether you buy "on the Board" or over-the-counter. All you care about is value for your money.

These two sample transactions illustrate, quite simply, what you really do when you enter the market. It's neither complicated nor difficult. You buy values-listed or unlisted!

Stop Loss Orders

In the summer of 1960, a new book How 1 Made $2,000,000 in the Stock Market written by a professional dancer, Nicholas Darvas, created quite a sensation. Actually it offered no new techniques for speculative success, but it stressed and popularized an old device the stop loss order. A stop loss order is one placed by a buyer or seller with a broker which automatically authorizes him to buy or sell a certain number of shares when a stock reaches a specified price. It is used to protect a paper profit or limit a possible loss in a stock.

To illustrate, suppose you buy 100 shares of Rexall at 50. You believe the stock will advance; the information about the company, the general condition of the market, and the specific "chart" performance of Rexall all indicate a forward movement in the stock. But you can be wrong in your judgment, and the evidence of that would be visible if the stock sold "off' from 50. So, as a defense against a possible error in judgment, you enter a stop loss order to sell at 47. If, then, the stock sells down to 47, you are "out." You incur a 3-point loss but prevent a greater one you might suffer if the stock sold down to 40.

The same tactic is useful when you have a fat paper profit. Suppose Rexall, which you bought at 50, advances steadily to 85. That looks pretty good to you, but still Rexall might go higher. So you enter a stop loss sell order at 82. If Rexall drops to that figure, you're "out." If Rexall keeps on going up, nothing happens.

The use of stop loss orders is, however, subject to the discretion of the governors of a stock exchange. Often the heavy placement of stop loss orders creates artificially wide price fluctuations in trading; and, in the interests of stability and a more orderly market, the New York Stock Exchange has on a number of occasions banned stop loss orders in certain issues. For periods during 1960, stop loss orders were forbidden on Studebaker-Packard "when issued," Nafi Corp., Natus Corp., and Lionel Corp. A stop loss is an interesting defense, but it can be overdone!
Don't think somebody is doing you a favor to execute your order; neither should you think that this business is difficult or complicated. You merely decide on what you want to buy, and ask the broker to execute your order at a price. But it isn't fair to waste the broker's time with requests for information and advice, unless you give him orders to execute.

The same technique (as outlined above) would apply with equal validity to any or all orders executed on the many exchanges in the United States; or over-the-counter. The exchanges customarily remain open between 10 A.M. and 3:30 P.M. each business day; while over-the-counter transactions may be executed over the phone, (and inter-city) at any time during the business day often before or after official trading hours on "exchanges."

So bear in mind that the "market" is universal. It embraces both "listed" and unlisted securities; and outstanding values may be found in either arena, and at any time!

Resume

1. Requirement for opening an account.

2. Execution of a "listed" order.

3. Execution of an "over-the-counter" order.

4. Usefulness of both markets in buying the right stocks.

Are You Ready To Move Onto The Next Lesson? Click Here...