Value motivated trade

[wilfrid147]

The CFA material states that a limit order is best for value motivated trade. But wouldn’t that depend on whether the stock is currently held?
If my DCF shows the market price of the stock is trading well above its intrinsic value and I’m currently holding it, surely it would be more suitable to execute a market order to get rid of the stock asap?

 

[Analyst mamba]

Yes you can get rid of your stock asap if you hit your intrinsic value. Value motivated trades do not have to be slow by any means as long as you hit your intended price target.

 

[ardeshir]

So if you think a stock is worth 50 and actually it’s trading at 43, you can submit a limit order for $50, and the stock will get executed at around $43.
A limit order is not an open ended “offer” to buy for $50 as such, it just states the minimum price that you are willing to pay, and if the market price is trading below it will probably get executed quickly (similarly to a market order) in this case…

 

[wilfrid147]

SO woujld you say market or limit orders are more suitable for value motivated trades?

 

[ardeshir]

wilfrid147 wrote:
SO woujld you say market or limit orders are more suitable for value motivated trades?

Always limit, and in any exam question it will be Limit orders that are better suited. THe key reasons are that there’s no rush to trade, and you want to make sure you buy at the value you deem appropriate.
In reality, it’s a bit blurry - generally the trader would have an idea of where the current stock is trading, and if he considers the price to be $50 and it’s trading for much less, he would prob submit a market order in this case, or a limit order with a buy price

 

[Analyst mamba]

Definitley limit order for the exam. Timing is not an issue for value motivated trade. Market orders benefit liquidity or information motivated trades