What are different order types?
When you want to buy or sell a share, prices are always moving; the price now can be very different from the price tomorrow. Most investors are keen to buy and sell shares only when they are at a certain price, the different ‘order types’ are the different instructions you give to your broker when you make a trade on how to act based on the price of a share, a stock fund, option or other security.
Market orders
What does it mean?
Placing a “Market Order” means that you want to buy the stock as soon as possible, regardless of the market price. For example, if you want to buy Google (GOOG stock right now because you think the current price is as low as it will go, you would place a market order to try to buy it as soon as you can.
Details
Market orders are what most beginner traders use the most; you see the price and you want to buy or sell at as close to that price as possible. But someone still needs to ‘fill’ your order for it to go through; just because you want to buy 50 shares of a stock doesn’t mean there are 50 people willing to sell them to you. This is especially true for penny stocks, which may be traded only a couple times a day, or less. For a market order, it’s also possible for you to get a different price for each individual share you buy. For example, let’s say the “last price” of a stock you want to buy is $100, and you place a market order for 50 shares. It may be that there are only 10 shares of that stock on sale left for $100, all other sellers are trying to sell for $120. This means that the first 10 shares you buy will be $100, and the next 40 will be at $120, giving you an average price of $116! This will never be a problem for large companies, but if you’re trading penny stocks or other low-volume securities (especially options), this can become a big problem.
Limit order
What does it mean?
A “Limit Order” is when you want to buy or sell something, but only at a “Good” price. You can decide what a “good” price is, both for buying and selling.
Details
When you buy, the limit price indicates the highest price you are willing to pay for the stock; if your limit price is already above the current price, it acts as a market order. For example, let’s say there’s a stock you want to buy, its current price is $55. You only want to buy it if the price drops to $50 or below, so you will place an order at the $50 limit. Your order will remain open and if the price falls to $50 it will be executed. For “Sell” orders, it works in the opposite direction: you enter the lowest price you want to sell it at. If the market price exceeds that price, your order will be executed.
Stop loss
What does it mean?
A ‘Stop’ order is when you want to prevent losing too much money on a position, which is why they are also called ‘Stop Loss’ orders. To buy, you want to make sure you get it before the price gets too high and you lose out, and to sell, you want to sell it before the price drops too low and you lose too much money.
Details
Stop orders work exactly the opposite of limit orders, you specify a ‘bad’ price and your order will be executed if the price falls below it. To buy, you would use a ‘Stop’ order if you are thinking of buying a stock, but don’t want to buy it until the price starts to go up. In this case, you would set a “Stop” order above the market price, and as soon as the market price goes above your stop price, your order will be executed. For selling, it works like a “loss prevention”, you would set your stop price at the point where you want to sell it if the price continues to fall, because you believe that if it falls that far, it will continue to fall.
Trailing Stop Orders
What does it mean?
Trailing stop orders follow the market; instead of setting a stop order to buy at $50, for example, you would set a trailing stop order to be executed as soon as the price rises by $1.
Details
At first, this may sound like a regular stop or limit order, but it’s completely different! For example, let’s say you place a Trailing Stop buy order for $1, on a stock with a current price of $100. If the price drops to $95, but then rises back to $96, your order will be executed because the price rose by $1 from the lowest point since you placed your order. If you’re doing a long-term strategy where you think a stock is falling now, but want to be sure you buy it as soon as the price starts going back up, a trailing stop order is your best friend. On the other hand, you can use a trailing sell order to make sure that you automatically sell off your position if the price starts to fall, no matter how high it goes up first. Many investors prefer to use trailing sell orders to regular sell orders so they can be sure that they preserve any profits they have made.
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