Question

Last year Mrs. Maria bought 40,000 shares of Ford Motors Corporation at $22 a share (the whole amount paid for this purchase was invested by Mrs. Maria).

a)      Find the rate of return of Mrs. Maria if Ford Corp. just paid $1.1 dividends per share and the stock is now selling for $32 a share.

b)     The stock is now selling for $32 a share, Mrs. Maria puts today a stop loss sell order at $28. Discuss her reasoning for this action.

c)      State one advantage and one disadvantage for each of the following types of orders

i) Market order.

ii) Limit order.

Answer 1

a)

rate of return= (current price-initial price + dividend)/ (initial price) =(32-22+1.1)/22*100 =50.45%

b)

Since the company has just paid dividend, the price will fall to adjust the premium in price of share when share was including dividend, hence Mrs.Maria has put a stop less order at $28 to limit her losses and book a profit in case share price falls below $ 28.

c)

i)Market order-Advantage-Trade is execute immediately as the trade is executed at ongoing market price.

Disadvantage-There can be small gaps in placing order and the time till it reaches the exchange, in this moment the price may increase or decrease substantially.

ii)Limit Order-Advantage-Trades are executed at the price we want.

Disadvantage-The trades are not execute immediately, we have to wait until the price reaches exactly the order amount.