In rapidly evolving markets, knowing how to negotiate is as important as knowing when to negotiate. Understanding the different types of orders and how to apply them can help investors avoid costly and unnecessary losses.
As more and more investors are choosing online home brokers or a broker over the phone, this often means that they must know exactly the type of buy or sell order they wish to execute.
Market orders – the most basic type of trading order
A market order is the simplest and fastest way to get your order placed. The market order instructs your broker to buy or sell shares immediately at the current price, whatever it may be. It doesn’t mean you’ll get the latest quote. In a volatile market, you’ll probably have a price close to it, but there is no guarantee of any specific price.
Typically, this type of order is executed immediately and traders can be sure that the order will be fulfilled. In addition, these will be the cheapest of the orders you can place.
Want more control over the transaction? Use limit orders
There is a variety of buy or sell orders that allows more control over the transaction than with a simple market order. They are called limit orders. Some restrict the transaction by price, while others restrict it by time.
Limit orders instruct your broker to buy or sell a stock at a certain price. A buy or sell won’t happen if you don’t get your price, allowing control over the entry or exit pricing.
Also called a stop-loss order, is an order to buy or sell a stock once the price reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A sell stop order is entered at a stop price below the current market price. Investors also use a sell stop orders to limit a loss or protect a profit on a stock they own.
The stop-loss order gives your broker a price trigger that protects you from a big drop in a stock. You execute a stop-loss order at a point below the prevailing market price. If the stock falls within this price range, the stop-loss order becomes a market order and your broker sells the stock. If it stays on the same level or goes up, the stop-loss order does nothing.
Buy limit – sell limit
A buy limit order, also called a buy stop order, allows you to purchase a stock at or below a specified price. It’s used by investors to limit a loss or to protect the profit they’ve made on a stock.
For example, if you want to buy shares of a $100 stock for $100 or less, you can set a limit order that won’t be filled unless the price you specified becomes available.
Although they are not guaranteed to carry out, adding such limit orders allows traders to control how much they pay, ensuring investors don’t pay more than a pre-determined price for a stock.
On the other hand, a sell limit order will sell a stock for a specific price. As all limit orders, a sell limit order is not guaranteed to execute, as it can only be filled if the stock price reaches the limit price or higher than that.
Buy stop order
This is a trade order used to limit a loss or protect an existing profit. It’s a buy order marked to be held until the market price rises to the stop price, then to be entered as a market order to buy at the best price available. The price is always above the existing market price.
Stock orders’ duration
Traders can also specify how long they want a particular order to be in effect, that is, how long the order will remain in the market until it’s canceled. Typically you’ll have several options:
Order for the day
An order for the day automatically expires at the end of a regular trading session, if it has not been executed. Several platforms use it as the default duration.
Good Till Cancelled (GTC) is an order that is active until trading is executed or if the trader cancels the order. Generally these orders are canceled if they are not executed within 30 to 90 days.
Good Til Date (GTD) is an order that remains active until a specified date, unless executed or canceled.
Immediate Or Cancel (IOC) is an order that requires all or part of the order to be executed immediately. Otherwise, the order, or the parts not executed, will be canceled.
Fill Or Kill (FOK) is an order that must be executed immediately in its entirety or it will be canceled. Partial execution is not accepted for this kind of order.
All Or None (AON) is an order that will be canceled if it cannot be fully executed by the end of the trading session. Partial execution is not accepted here.
Take Profit (TP) is an order that closes out the trade, once it has reached a certain level of profit. Execution of a Trade Profit closes the position, meaning that the trade is closed at the current market value.
These orders may be found with slightly different names, but the concept will be the same. There are many others, but you won’t use them as often. The most important thing to know is the right time to use each of them. Learn when and where to invest your money to profit from the opportunities the stock market offers every day.
Of course, you won’t be free of risks and these tools won’t protect you from losses. However, it’s possible to plan ahead and control damages, should they come. With planning, strategy and knowledge combined, you can increase the safety of your investments.