Fundamentals of Financial Instruments, 2nd Edition

CHAPTER 12Orders and Exchanges

An order is an instruction to trade that is given by a party who wishes to take a position in an asset. If parties wish to establish a long position, they will issue a buy order, whereas if they desire to go short, they will place a sell order. At the time of placing an order, the security in which the investor wishes to take a position must be clearly identified. This is fairly simple in the case of stocks because most companies usually issue only one type of shares. It must be remembered that some firms may have issued equity shares with differential voting rights, or even nonvoting shares, in which case merely specifying the name of the company will not be adequate. Bonds are more complex. Company XYZ may have issued bonds maturing in 2025 or in 2030. In 2025 there may be an issue maturing in January and possibly one in October. There may be multiple types of bonds maturing in the same month and in the same year, but with different coupons. Thus, XYZ may have bonds maturing in October 2025 with a 5% coupon as well as with a 6% coupon. Hence, if traders wish to buy or sell bonds, they must identify the issuing company and specify the maturity year, the month of maturity, and the coupon rate. Without such a detailed description, the specification may be inadequate. There are certain supranational agencies that may issue bonds with the same month and year of maturity, and the same coupon rate, but with different currencies, say, US dollars and ...