Trading Stocks & Types Of Orders

 

Basics

First you need to do your research to determine the type of stock you want to purchase see 
Stocks: Buying, Selling & Researching  Once you have decided to buy or sell a stock you need to contact your brokerage firm (see Stock Brokers & Brokerage Accounts).  The type of account you have will affect the cost/commission/fee you will have to pay for the trade.  Also, based on the kind of account you have, this can be done either on the phone or electronically on the internet.  Again, remember you have be eighteen to trade.  However, you can set up an account with an adult.

When you place an "order", you provide your broker not only the name of the stock and the number of shares you want to purchase (or sell), but also the type of trade you want to execute (or filled).  Trade executions, in most cases are quick, but not instantaneous.  With a fast moving stock or market the price you see before you execute your trade can vary significantly from the price at which you buy or sell.  Based on the type of order you place, you can put limits or conditions on the order.  Following are the most frequent types of orders.  However there are other more complicated trades such as, "puts options", "call options" and "short sales", that only experienced traders use.  You should discuss these with your broker.

 

Market Order

This is the most common type of order.  You give your stockbroker an order to buy or sell a specific number of shares for a specific stock.  The broker will try to fill it at the best price currently available which is called Market Price.  This means the lowest price if you are buying, and the highest price if you are selling.  This is the simplest type of order.  You are almost guaranteed your order will be executed.  The disadvantage could be the price you buy or sell at. 

For Example:  In a fast moving market you can place an order, for High Five Corporation (HFC) stock, currently selling at $30.  By the time the order is executed it could be $40, which might be more than you wanted to spend.


 

Limit Order

This allows you to set a limit for the amount you are willing to buy or sell a stock.  A buy limit order will only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.  Limit orders may never be executed if the market moves quickly, or does not meet your limit instructions.  Most limit orders will have an expiration date.  Because this is a more complicated process than a market order, some firms might charge a higher fee.  To continue with the above High Five Corporation (HFC) stock order example, below is an example of a buy limit order and a sell limit order.
  • Buy Limit Order:   If you put a buy limit order for High Five Corporation (HFC) at $35, you would not receive it if the price jumped to $40, from the original $30.  This prevents you from paying more than you wanted to.  Your brokerage would only purchase the stock for you if they could find a person who is willing to sell you shares under $35.  The potential negative is that if the stock continued to rise to $50, because you put a limit at $35, you did not get the stock, and you missed the potential profit of a rising stock.
  • Sell Limit Order:   If you put a sell limit order for HFC at $40, it can be sold as soon as it reaches $40, but it could also be sold higher.  As soon as the stock reaches $40 your broker would try to sell it.  You might get $41 for example.  If the stock sells at $41, and then the stock price rises to $50, you would have missed an extra $9 profit.  However you still would have made money assuming you purchased it at $35, which would be a $6 profit.  Remember any profit is a good profit.

 

Time Order

You can also place a limit, or not, on the time your order must be filled.
  • Day Orders:  Unless you specify otherwise, all orders are day orders, meaning they are good for only the day you place the order.  If the order is not executed by the end of the trading day, it is cancelled. It will not be carried over into after-hours trading or the next day.  If you want the order to be executed the next day, you must place your order again.
  • Good-till-Cancelled (GTC):  In this case all day orders primarily limit orders, remain in place until they are executed or cancelled. GTC orders can remain in effect for a day, a week, or a month.  However, some brokerage accounts might limit the number of days an order can remain in effect.

 

Conditional Order

These are orders, other than limit orders, that requires a broker to perform a specific act (buy or sell) when certain conditions are met.
  • Stop Order:  A stop order is only used after a stock has been purchased.  These are orders to buy or sell a stock once a certain price has been reached, known as a “stop price”.  It was designed to attempt to protect a profit or prevent further loss if the stock starts to go down.  When the stop price has been met, your order becomes a market order.  With these types of orders customers don’t have to continuously monitor the price.  Once the stop price is reached, it becomes active, your order kicks in and becomes a market order.  Two negatives:  First, once the stop price has been met and it becomes a market order, the final price your order is executed might be very different from your stop price.  Second, if for some reason the stock’s price fluctuates for a brief time, it will trigger your stop order, even for example if the stock quickly rebounds on the upside.  These orders are more frequently used for stocks that are traded on an exchange vs. Over the Counter (OTC) stocks.
  • Buy Stop Order:   Buy Stop Orders are placed by investors who think a stock is going to go higher.  The stop price (in this case the buy stop order price) must be higher than the current market price.  If for example High Five Corporation (HFC) is currently selling at $35, you might put a buy stop price at $40.  If the stock reaches the stop price (buy stop price), it becomes a market order.  It is designed to protect a profit or limit a loss on a "short sale".  (This is an advanced financial term.  You can go to the following website for additional information: http://www.investorwords.com/4556/short_sale.html
  • Sell Stop Order:   A sell stop order is used only after a stock has been purchased.  It helps investors avoid greater losses or protect profits if the stock price continues to drop.  The stop price must be lower than the current market price.  If for example High Five Corporation (HFC) is currently selling at $35 (you might have purchased it at $25), you may be worried the stock price will drop and you want to make sure you receive a profit.  You could put a sell stop order for $30.  If it reaches that price the broker would then sell at the next available price.  Stop sell orders are generally used to protect a profit or limit a stock already purchased at a higher price.  Remember, a stop order won’t guarantee a price you will get.  It becomes market price and sold as soon as possible, whatever the price.

 

Stop Limit Order

These combine the features of a stop order and a limit order.  Once the “stop price” has been reached the stop limit order becomes a limit order to buy or sell at a specific price.  This is another way investors can control the price at which the order is filled.  But, as with all limit orders; your order may never be filled if the stock price never reaches the limit order.  These are also used primarily on stocks that sell on exchanges, not OTC.  For example if HFC is trading at $50, you might put in a stop limit order with a stop price at $45 and a limit price at $42.  If the price falls to $45, the stop price is activated, if the stock can be sold above $42, the trade will be executed.  If the stock falls below $42, let’s say to $40, the order will not be filled.  It can help protect your investment, but your transaction is not guaranteed if the conditions are not met.