I wanted to buy stock ABCD at a price of 880. The current price was 900. When I bought, I set 980 instead of 880 and it was fully executed. I don't understand how it is possible to buy stock at a higher price than current price?
Now let's say I own stock ABCD in my account, then do I get any penalty for having bought it at a higher price?
I am really worried about what to do...!
I don't understand is it possible to buy stock at higher price than current price?
This is a very common misunderstanding.
Stocks do not have a "current price" that you can buy them for.
Any "stock price" that you see quoted is not like a price in a store that means you can buy at that price. Instead, a "stock price" only tells you at what price the stock was traded at some point in the past.
When you enter a buy order with a price, you're offering to buy at that price. The stock exchange will match your order with many other orders and determine the price at which the most stock can be traded, and then executes the matching orders.
Chances are that if you entered a price of 880 for your order, it would not have been executed since nobody was willing to sell at that price. It is possible that you could have gotten the stock cheaper if there were no other buyers and the sellers had a lower limit.
These kind of big differences generally only happen on small exchanges with illiquid stock that is rarely traded. Which is why that kind of stock is inherently risky, partially because past price information is pretty meaningless.
I set 980 instead of 880 and it is fully executed.
Suppose I'm on the other side of your transaction. I might own a stock worth around that $900 price, but have a $980 target. In other words, I'm happy to sell it for $980, so I have a standing sell order at $980. If any bids appear at $980, and I'm a willing seller at that price, I might see my order fill. Let it be a lesson, you just need to be very careful when placing orders.
The limit order will match to best offer on books. Let's say the best sell price was 900, it will match to that. You will pay 900.
- I don't understand how it is possible to buy stock at a higher price than current price?
The price listed on a stock ticker is not an absolute "price." It is simply the price at which the stock has most recently traded at.
A trade will execute when books are able to match Buyer to Seller at an agreed upon price. In your example, you erroneously agreed upon 980 and it was matched to a Seller who agreed upon 980.
Few scenarios to clarify when a order will match/execute:
Buyer sets limit order at 880, Seller sets limit order at 880. Matched at 880.
Buyer sets limit order 880, Seller sets limit order 920: No match until someone budges on agreed price or a market order enters the mix.
Seller sets market order. Matched to first available Buyer.
Buyer sets market order: Matched to first available Seller.
Investopedia: Orders Market/Limit Differences
- Do I get any penalty for having bought it at a higher price?
There is no formal penalty.
"Price is what you pay, value is what you get." -Warren Buffett-
The clerical error made on your part of typing 980 instead of 880 most likely cost you money. If you had entered the the desired 880 it might have been filled when a limit sell order at 880 or below was entered or a market order. And only if you were the top buying bid (i.e. if a buy limit order existed at 890 it would be matched before yours).
Learning about Level II might make this more clear
- Now let's say i got that stock in my account, then do i get any penalty for buying it higher price?
There's no "penalty" involved (at least in how I would interpret that term).
If you had entered your intended price correctly (880), and if the price then went on to drop from 900 to that value (or below) then you would have got the stock at a lower price, and you potentially might have saved some money. If the price then turned around and rose, your potential profit would have been greater than having bought it at 900. On the other hand, the price could have continued to drop and you would be out of pocket.
However, there is no guarantee that the price would have dropped initially: it may have remained at around 900 or, indeed, have risen. In either of those cases, your order at 880 wouldn't have been fulfilled and you wouldn't own a stock. If the price were to rise, you would have been better off entering the "incorrect" value (buying at 900; able to sell for some profit) than having entered the "correct" value (never having bought the stock; no possibility of a profit). Of course the price could also have fallen after buying at 900 and you would have a higher loss than if you had bought at 880.
In other words: depending entirely on the (unknowable) future price of the stock you could have gained or lost money either way. Under some scenarios it would have been better to enter the "correct" price; under others it would have been better having entered the "wrong" price.
It is possible to buy a stock at higher than the quoted price. When you buy a stock, it is important to set a limit order. The price can also change pretty substantially, so if this was a volatile stock, it would've been better to set a "limit", meaning you cannot buy past a certain limit. Since you had to enter a price, i'm assuming you did buy at a limit, which means your broker would get you a price at the best available price. I could set a limit at $1,000 for a stock quoted at $900, but this doesn't mean that my order will fill at $1,000. It means that I will buy up to the price available being at $1,000 (in simplified terms).
No one has yet mentioned how the HFT (high frequency trading) algorithms and/or dark pools would factor into this situation:
If a stock is currently trading at $900/901 lets say (highest bid 900, lowest ask 901) and you offer to buy at $980, a front running algorithm (typically run very close to the exchange with very fast computers) will see your order come in and know that it could immediately sell to you for 980 and then (before any other orders) buy the ask from the order book at $901 for a $79 profit. For this reason is is possible to buy a stock far higher than currently priced, which is why care must always be taken during any financial transaction.
