The basics of trading a stock is simple once you get the hang of it. In fact there is an art to trading a stock. With the developing sophistication of technology and online resources more and more investors are making the decision to buy and sell stocks on their own as opposed to having to pay advisors expensive commissions to do the work for them. If this describes you then before you jump in feet first you need to understand the different kinds of orders and when they are suitable. Education on stocks and the trading of such is essential to your success.
There are two main types of orders. There are market orders and limit orders. Let us take a look at both kinds now.
A market order in the world of investing is an order to purchase or sell a stock as soon as possible at the best price that is available. While market orders do not guarantee a price to the investor, they do bring a guarantee of the order’s immediate execution. In other words, the filling of the order. In most cases if you plan to purchase a stock then you will be required to pay a price that is close to the posted ask. On the other hand, if you plan to sell a stock then the price you will be offered will be close to the posted bid.
One thing that it is important for you to bear in mind is that the last-traded price of the stock is not necessarily going to be the price that the market order will be executed at. When markets are volatile and moving at a very fast pace the price at which the trade is filled or executed may end up being different from the price that the stock was last traded at.
Who are market orders popular with? They are favored by individual investors who wish to buy a stock or sell a stock without any sort of waiting period. Market orders are immediate and are good for investors who are in a hurry. While the investor will not know the precise price that the stock was purchased or sold at, market orders that trade in the range of tens of thousands of shares on a daily basis are more likely to be filled close to the asking and bidding prices.
Limit orders are slightly different from market orders. A limit order is such that the minimum or maximum price is set at whatever the investor is willing to buy or sell a stock at. To give an example of this, if you wanted to purchase a stock at a price of $10 then you would choose the limit order of $10. What this means is that you will pay $10 for the stock. You will not pay anymore or any less. However there are cases where the stock will sell for less than $10 but this does not happen all of the time.
Which Choice is Better- Market or Limit Order?
Both choices are good and are dependent upon circumstance. There are advantages and disadvantages to both types of orders. When trying to decide between the two of them you need to be aware of the additional costs that go along with them. In most instances market orders come with cheaper commissions than do limited orders. The difference in the commissions can be anywhere from $1 to $2 dollars and up to $10 or more. A $10 commission for example can shoot up to $15 if a limit restriction is placed upon it. When you decide to place an order keep these things in mind.
Let us look at a concrete example of this in action. Let’s say that a brokerage firm charges investors $10 for a market order and $15 for a limit order. At the present time a stock that we will call ABC is trading at $50 a share. As an investor it is your wish to purchase the stock for the price of $49.90. If you decide to place a market order that will allow you to purchase 10 shares then you will pay $500. In other words, 10 shares x $50 per share + $10 commission comes to $510. On the other hand, a limit order for the same 10 shares for the price of $49.90 will look like this- $499 + $15 commission equals $514. While you saved a small amount of money when you purchased the stock at a reduced price, the additional costs brought the price up higher.
Added Restrictions and Special Instructions
The basics of trading a stock starts with understanding the difference between market orders and limited orders. Once you comprehend this then you need to learn about extra restrictions and special instructions that brokerage firms sometimes permit on their orders.
A stop order is one of the most beneficial of all of the orders. It goes by other names such as stopped market, on-stop buy, stop loss or on-stop sell. This order is not the same as market or limit orders. These orders go into effect as soon as they are placed. A stop order on the other hand does not become active until a particular price has been passed. Once that happens then the stop order becomes a market order.
Consider it like this, if a stop-loss sell order is placed on ABC shares that are $45 per share then the order will not become active until the price either reaches $45 or drops below $45. Once that occurs then it becomes a market order and the shares are sold at the price that is the absolute best available. A stop order is a smart choice if you are short on time and are not able to monitor the stock market as often as possible. However if you require protection from a large downsize move then this order is a savvy one for you. A stop order is one that many people use before they take a vacation or go away on business.
An all-or-none (AON) order is instrumental for those investors for wish to purchase penny stocks. An all-or-none order, which is sometimes abbreviated to AON, guarantees that you will get all or none, as the name implies. In other words, you will receive either the complete quantity of the stock that you wanted or you will receive none at all. This becomes a very problematic and precarious situation when a stock is quite liquid and/or if a limit is placed on the stock order.
Let us examine an example of an AON order. If you place an order to purchase 2,000 shares of ABC but there are only 1,000 that are up for sale then an AON restriction will mean that your order will not be executed until there are 2,000 share or more of ABC available at the price that you are seeking. If you decide not to place an AON restriction on an order then what that means is that your request for 2,000 shares will be partially filled for 1,000 ABC shares.
Good ‘Til Cancelled (GTC)
The good ‘til cancelled order or GTC is a time restriction that you are permitted to place on different stock orders. A GTC order remains active until at which time that you, the investor, make the decision to cancel it. Most brokerage firms limit the amount of time that an order can remain active. It is generally 90 days (three months).
If you decide to place a good ‘til cancelled order but you do not give an expiration for the time frame then what happens in most cases is that the order will be set as a day order. This means that at the end of a day of trading the order will be over with and its expiry time will have elapsed. If the order is not filled (or transacted as it is sometimes referred to) then when the next trading day rolls around you will have to re-enter the order.