What is a Firm Order?
A firm order is an instruction placed with a broker to execute a transaction in various markets, including securities, commodities, and currencies. This order remains valid and executable under the specified terms for the stated period or until it is cancelled. The key feature of a firm order is that it does not require the broker to seek further confirmation from the principal if the order meets the preset terms within the provided timeframe.
Key Characteristics
- Validity Period: The firm order remains active for a specified period unless explicitly cancelled.
- Execution Assurance: If the broker can execute the terms of the order within the stipulated period, no additional confirmation from the principal is necessary.
- Flexibility: The terms can include specific prices, quantities, and time frames.
Examples of Firm Orders
- Stock Trades: An investor places a firm order to buy 100 shares of a company’s stock at $50 per share, valid for one week.
- Commodity Transactions: A trader issues a firm order to purchase 200 barrels of crude oil at $60 per barrel, valid until the end of the month.
- Currency Exchange: A company needs to exchange $100,000 USD to Euros at a rate of 1.2, with the order firm for 48 hours.
Frequently Asked Questions (FAQs)
What happens if the broker can’t execute the firm order within the validity period?
If the broker cannot execute the order within the specified period, the order becomes void unless it is renewed or a new order is placed.
Can a firm order be modified?
While the order is firm for the stated period, generally it cannot be modified. However, a new order can be placed, or the existing order can be cancelled and reissued with different terms.
Is my investment still liquid with a firm order?
Yes, a firm order does not impede your liquidity, but it does commit your funds to a specified transaction under certain conditions for the duration of the order period.
Market Order
An instruction to buy or sell a security immediately at the best available current price.
Limit Order
An order to buy or sell a security at a specific price or better. Buy limit orders are executed at the limit price or lower, and sell limit orders are executed at the limit price or higher.
Fill or Kill (FOK) Order
An order to buy or sell a security that must be executed immediately in its entirety or else it is cancelled.
Online References
Suggested Books for Further Studies
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “Security Analysis” by Benjamin Graham and David L. Dodd
- “Reminiscences of a Stock Operator” by Edwin Lefèvre
- “The Intelligent Investor” by Benjamin Graham
Accounting Basics: “Firm Order” Fundamentals Quiz
### What type of instruction does a firm order provide to a broker?
- [ ] An indefinite instruction actionable at any time.
- [ ] An unfunded mandate requiring further consultation.
- [x] A definitive, time-bound instruction to execute under specific terms.
- [ ] A suggestive recommendation without binding terms.
> **Explanation:** A firm order is a definitive instruction that is actionable under specific terms and for a specified time period or until cancelled.
### How long does a firm order typically remain in effect?
- [ ] Indefinitely until completion.
- [x] For a stated period or until it is cancelled.
- [ ] Only for a market session.
- [ ] Until the principal manually reaffirms it.
> **Explanation:** A firm order remains in effect for a stated period or until it is explicitly cancelled by the principal.
### What must a broker do if unable to meet the terms of a firm order within the validity period?
- [ ] Execute partial orders.
- [ ] Alter the terms and proceed.
- [ ] Hold the order indefinitely.
- [x] Void the order unless renewed or reissued.
> **Explanation:** If a broker cannot meet the terms of a firm order within the validity period, the order becomes void unless renewed or reissued.
### Can a firm order be altered once it is placed?
- [ ] Yes, through direct broker intervention.
- [x] No, it must be cancelled and reissued with new terms.
- [ ] Yes, with minor adjustments allowed.
- [ ] It's impossible to change any orders.
> **Explanation:** A firm order generally cannot be modified. It must be cancelled and a new order must be placed if changes are required.
### What is a key benefit of placing a firm order?
- [ ] Guaranteed increase in asset value.
- [ ] Unlimited validity.
- [ ] Low trading fees.
- [x] Execution consistency under preset terms.
> **Explanation:** The key benefit is the execution consistency under the preset terms without needing further approval from the principal.
### Who benefits more from placing firm orders, retail investors or institutional investors?
- [ ] Only retail investors.
- [ ] Only institutional investors.
- [x] Both retail and institutional investors.
- [ ] Neither, as it is negligible.
> **Explanation:** Both retail and institutional investors can benefit from the precision and planning that firm orders provide.
### Which of the following situations is NOT suitable for a firm order?
- [ ] Locking in favorable rates.
- [ ] Market conditions expected to fluctuate wildly.
- [x] When the principal expects to be highly reactive to changes.
- [ ] Long-term investment horizons.
> **Explanation:** Firm orders are not suitable when the principal expects to react swiftly to changing market conditions, as these require flexibility and real-time decisions.
### What distinguishes a firm order from a market order?
- [x] Specified terms and time frame versus immediate execution.
- [ ] Higher transaction costs.
- [ ] Requirement for principal's approval.
- [ ] Larger transaction volume.
> **Explanation:** A firm order is characterized by its specified terms and duration, unlike a market order which is immediately executed at the best available price.
### When is the BEST time to use a firm order?
- [ ] In highly volatile markets.
- [x] When seeking assurance of terms within a defined period.
- [ ] For speculative trading.
- [ ] When liquidity is a major concern.
> **Explanation:** Firm orders are best used when there's a need for assurance that specific terms will be met within a defined period.
### Which term best defines a firm order?
- [ ] Flexible
- [x] Time-bound
- [ ] Indeterminate
- [ ] Suggestive
> **Explanation:** A firm order is primarily defined as time-bound given its period of validity or until cancellation.
Thank you for engaging with this thorough explanation of firm orders and testing your knowledge with our sample quiz. Continue honing your expertise in financial markets and trading!
