Stock trades? Come on, get to know the types of orders in stock trading
With the development of digital technology and the internet, many investors are choosing to buy and sell stocks for themselves online rather than paying large commissions to advisors for making trades. However, before you start buying and selling stocks, it is important to understand the different types of orders and when to place them.
In this article, we'll cover the basic types of stock orders and how they complement your investing style.
Market Orders vs. Limit Order
The two main types of orders that every investor should know are market orders and limit orders.
Market Order
Market orders are the most basic type of trading. This is an order to buy or sell immediately at the current price. Usually, if you are going to buy a stock, then you will pay the price at or near the posted request. If you are going to sell a stock, you will receive a price at or near the posted bid.
One important thing to remember is that the price of the last trade is not necessarily the price at which the market order will be executed. In a fast-moving and volatile market, the price at which you actually executed (or filled) the trade could deviate from the price you last traded at. The price will stay the same only if the bid/ask price is exactly at the last price traded.
Also read: Difference Between "Supply & Demand" and "Support & Resistance"
Market orders are very popular among individual investors who want to buy or sell shares without delay. The advantage of using market orders is that you are guaranteed a trade with filled orders; In fact, it will be executed as soon as possible. While investors don't know the exact price at which shares will be bought or sold, market orders on shares trading in excess of tens of thousands of shares per day are likely to be executed near the bid/ask price.
Limit Order
Limit orders, sometimes referred to as pending orders, allow investors to buy and sell a security at a specified price in the future. This order type is used to execute a trade if the price reaches a predefined level; the order will not be filled if the price does not reach this level. As a result, limit orders set the maximum or minimum price at which you are willing to buy or sell.
For example, if you want to buy a stock for $10, you can enter a limit order for this amount. This means you won't be paying a dime more than $10 for a particular stock. However, you can still buy it for less than the $10 per share specified in the order.
There are four types of limit orders:
Buy Limit: an order to buy a security at or below a specified price. Limit orders must be placed on the correct side of the market to ensure they will complete the pricing task. For buy limit orders, this means placing the order at or below the current market bid.
Sell Limit: an order to sell a security at or above a specified price. To ensure a better price, orders should be placed at or above the current market demand.
Buy Stop: an order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a certain price level is reached (known as a stop level). Buy stop orders are placed above the market and sell stop orders are placed below the market (as opposed to buy limit orders and sell limit orders). Once the stop level is reached, the order will be immediately converted into a market or limit order.
Sell Stop: an order to sell a security at a price below the current market demand. Like a buy stop, a stop order to sell becomes active only after a certain price level is reached.
Market Fees and Limit Orders
When deciding between market or limit orders, investors should be aware of the additional costs. Usually the commission is cheaper for market orders than limit orders. Commission differences can range from a few dollars to more than $10. For example, a $10 commission on a market order can be increased up to $15 if you place a limit order on it. When you place a limit order, make sure it is useful.
Let's say your broker charges $7 for market orders and $12 for limit orders. XYZ stock is currently trading at $50 per share and you want to buy it for $49.90. By placing a market order to buy 10 shares, you pay $500 (10 shares x $50 per share) + $7 commission, which is a total of $507. By placing a limit order for 10 shares for $49.90, you will pay a commission of $499 + $12, which is a total of $511.
Even if you save a little from buying the stock at a lower price (10 shares x $0.10 = $1), you will lose it in the additional charge to the order ($5), a difference of $4. Furthermore, in the case of a limit order, there is a possibility that the stock will not drop to $49.90 or less. So, if it continues to rise, you may lose the opportunity to buy.
Additional Stock Order Type
Now that we've explained the two main orders, here are some additional orders and special instructions that many different brokers allow in their orders:
Stop-Loss Order
Stop-loss orders are also referred to as stop markets, on-stop buys, or on-stop sells. This is one of the most useful commands. These orders differ in that, unlike limit and market orders, which are active as soon as they are entered, they remain inactive until a certain price is crossed, at which point they are activated as market orders.
For example, if a stop-loss sell order is placed on stock XYZ at a price of $45 per share, the order will not be active until the price reaches or falls below $45. The order will then be converted into a market order, and the stock will be sold at the best available price. You should consider using this order type if you don't have time to observe the market constantly but need protection from a large downside move. The best time to use stop orders is before you go on vacation.
Stop-Limit Order
This is similar to a stop-loss order, but as the name suggests, there is a price limit at which this order will be executed. There are two prices specified in a stop-limit order: the stop price, which will turn the order into a sell order, and the limit price.
Instead of an order being a market order to sell, a sell order becomes a limit order that will only be executed at the limit price or better. This can reduce potential problems with stop-loss orders, which can be triggered during a flash crash when price plummets but then recovers.
All or None (AON)
This type of order is especially important for those who buy penny stocks or fractional stocks. All-or-none orders ensure that you get the full amount of stock you ask for or not at all. This is usually problematic when the stock is highly illiquid or there is an order limit.
For example, if you place an order to buy 2,000 shares of XYZ but only 1,000 are sold, the all-or-nothing restriction means that your order will not be filled until at least 2,000 shares are available at your desired price. If you don't place an all or nothing limit, your 2,000 shares order will be partially filled for 1,000 shares.
Immediate or Cancel (IOC)
IOC orders mandate that a certain number of orders that can be executed on the market (or to some extent) in a very short time span, often just seconds or less, are filled and then the remaining orders are cancelled. If no shares are traded in the "immediate" interval, the order is canceled completely.
Fill or Kill (FOK)
This order type combines AON orders with IOC specifications; in other words, it mandates that the entire order size be traded in a very short period of time, often a few seconds or less. If the conditions are not met, the order is cancelled.
Good Until Canceled (GTC)
This is the time limit that you can place on different orders. Orders that were good until canceled will remain active until you decide to cancel them. Brokers will typically limit the maximum time you can keep an order open (or active) to 90 days.
Day
If you don't specify an expiration time via the GTC instructions, then the order will usually be designated as a daily order. This means that after the end of the trading day, the order will expire. If it is not traded (filled) then you have to re-enter it on the next trading day.
Take advantage
A take profit order (sometimes called a profit target) is intended to close a trade with a profit after reaching a certain level. Execution of a take profit order closes the position. This type of order is always connected to the open position of the pending order.
Not all brokers or online trading platforms allow all these types of orders. Check with your broker if you don't have access to the particular order type you want to use.
Conclusion
Knowing the difference between limit and market orders is fundamental to individual investing. There are times when one or the other will be more appropriate, and the type of order is also affected by your investment approach.
Long-term investors are more likely to follow market orders because it is cheaper and investment decisions are based on fundamentals that will play out over months and years, so current market prices are not an issue. However, a trader wants to act on the short-term trend in the chart and, therefore, is much more aware of the market price being paid; In this case, a limit order to buy with a stop-loss order to sell is usually the minimum to set a trade.
By knowing what each order does and how each order can affect your trades, you can identify which orders will suit your investment needs, saving time, reducing risk and most importantly, saving money.