Orders, liquidity and trading costs

Two order types

A practical rule of thumb: the thinner the trading and the larger the amount, the stronger the case for a limit price. In a liquid large company with a small amount, the difference is often negligible.

Liquidity: can you get out when you want to?

Liquidity means how easily a stock can be traded. A highly liquid stock always has buyers and sellers, so making a trade doesn't move the price.

In a thinly traded stock, the situation is different: the spread is wider and your own order can move the price. The problem shows up especially when you sell. Just when you'd like to get out quickly, it can be hard to find a counterparty.

What makes up the costs?

The total cost of a stock trade is more than just the fee.

Currency: a second return component

When you own a stock priced in another currency, your return is made up of two parts: the stock's performance and the change in the exchange rate. Each can be positive or negative independently of the other.

Currency risk shouldn't be seen only as a drawback. It is also diversification: the euro doesn't always move in the same direction as other currencies, and an international portfolio also spreads currency risk.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

A practical checklist

• Use a limit price when the stock is thinly traded or the amount is large.
• Avoid the first and last minutes of the trading day. The spread is often wider then.
• Check that the target market is open when you trade a foreign stock.
• Weigh the minimum fee against the size of the purchase so that the cost doesn't become disproportionate.