More Papua New Guineans are trading shares.
As recently reported by JMP Securities, monthly turnover on PNGX is trending up and is expected to further increase after the elections.
But how are shares traded?
In Papua New Guinea, when you want to buy or sell shares in a company which is traded on PNGX, you need to use a stockbroker. You need to open an account similar to opening a bank account.
When you want to buy (or sell) shares, you need to give an order to your stockbroker. They must then follow your instructions.
When you give your instructions to your stockbroker the key information you will give them are:
- The company you wish to buy (or sell);
- The number of shares; and
- The price.
There are 2 types of orders you can use for price. These are
- A “limit” order, which is where you set a specific price at which you will buy (or sell); or
- A “market” order, which is where you are agreeing to buy (or sell) at the price of the lowest sell (or buy) order currently in the market.
An order to buy is called a bid. An order to sell is called an offer.
Once you have given your order to your stockbroker, they are obliged to put your order into the PNGX trading system as soon as possible so that the market can see your order.
When a stockbroker places an order in the market, the order is placed in the queue of orders. The PNGX trading system manages all orders in a specific way to ensure that all orders are handled fairly. This process manages all orders in a “price – time priority” manner.
“Price – time priority” means that a higher buy order will take priority over a lower priced buy order. Similarly, a lower priced sell order will take priority over a higher priced sell order. If 2 buy (or sell) orders are placed in the market at the same price, the buy (or sell) order placed earlier will have priority over the order at the same price placed later.
“Price – time priority” encourages investors to improve the pricing in the market by increasing the buying price or decreasing the selling price to encourage more trading.
For example, if the current market for a company has 3 bids to buy at different prices and 2 offers to sell at different prices the order book will look like this:
You can see that the best bid with highest price is at the top of the bid queue and the best offer with the lowest price is at the bottom of the offer queue. The “spread between the best bid and offer is 0.03.
If a client places a new “limit” buy order for 500 shares at 12.43, the order book will change to look like this:
The spread between the best bid and offer has reduced to 0.02 but because there is still a spread the order will not trade but will wait until a sell order at 12.43 is placed in the market.
If a second client places a new “limit” buy order for 800 shares at 12.43, the order book will change to look like this:
The buy order for 800 shares sits behind the order for 500 shares because it was entered in the market later.
Now assume a third client places a new “limit” buy order for 700 shares at 12.45, the order book will change to look like this:
Because the bids and offers are at the same price those 2 orders will instantly trade at 12.45. The buyer will buy 700 shares and the seller will sell 700 of the 2,000 they have offered to sell. Instantly, the order book will change to look like this:
The trade of 700 shares at 12.45 will be reported to the market and the best bids and offers will have a spread of 0.02.
If a fourth client now places an order to sell 1,200 shares “at market” the order book will change to look like this:
The “at market” sell order is entered at the same price as the best buy order of 12.43
Again, there are bids and offers at the same price, but because there are 2 buy orders at 12.43 for a total number of shares (1,300) larger than the sell order (1,200), the 3 orders will instantly trade at 12.43. The seller will sell 1,200 shares and first buyer will buy 500 and the second buyer will buy 700. Instantly, the order book will change to look like this:
Trades of 500 shares and 700 shares at 12.43 will be reported to the market and the second buyer will have an order of 100 shares remaining in the market.
The information in this article is general in nature and you should take care to inform yourself about the specific characteristics of a particular investment before making a decision to invest in it. PNGX recommends discussing your investment objectives and needs with a stockbroker or qualified financial adviser. In PNG, you can either contact JMP Securities Limited (enquiries@jmpmarkets.com) or Kina Securities Limited (wealth@kinabank.com.pg).
By following these articles and reading the information available on the PNGX website (www.pngx.com.pg) or following PNGX on LinkedIn or Facebook you can learn more and build your wealth by investing in PNG.
