There seems to be a series of steps that every new investor goes through when they first start. First, they see the amount of money that they could make in the stock market and they decide they want to try their luck to see if they can achieve good results. Second, they sign up or create their own investment account through one of the many banks or brokers available. And third, they find themselves stumped when they’re presented with options on how they’d wish to buy the stock they’ve been dreaming about.
Market order? Limit order? On margin? These are terms that someone who has never invested before can be easily confused by. And it can be enough to turn a confident and aspiring new investor into an unsure googly eyed nervous wreck. But not to worry; these options, called order types, are easy to understand.
Put quite simply, a market order is an immediate fulfillment request for the best available price. If quotes are currently showing with a bid price (the price a dealer will buy the stock for) of $50 and an ask price (the price a dealer is willing to sell the stock for) of $51, a market order should process your purchase at a price no larger than $51. Conversely, if you place a market order to sell your shares in that same stock, you should be able to sell them for no less than $50.
Limit orders are a little different. Instead of being an immediately executable request at the best price, it will only go through if there is a seller that is offering the stock within your set parameters. When you place a limit order to buy, the market will attempt to find a seller up to a limit you set. For example, if you place a limit order to buy of $53, the market will process your order if there is a seller that is offering it for any price underneath that amount. In reverse, if you were to list a limit order to sell your stock for $53, the market would fill your order for the best price as long as it isn’t lower than your limit of $53.
What makes a market order and a limit order different is that the market order will immediately fill your request for the best price currently available while a limit order will only fill it if it can find shares that fit your designated price within a set time frame. Market orders ensure your immediate entry or exit into/from the stock but the price can sometimes be higher or lower than you’d prefer within the bid-ask spread (the difference between the bid and ask price). Limit orders, on the other hand, will only fill the order if it fits your set parameters so you can make sure you get the price you want. That being said, limit orders can sometimes cause investors to miss their chance at a quick entry or exit.
Limit Order Flexibility:
Limit orders are, however, fantastic tools with great flexibility. When an investor places a limit order, they are able to place other specifications as to how long that order stays open. For example, you could ask that it be set as good ‘til canceled (GTC). By doing so, it will keep the order open until it can either be filled or until you cancel it. Or, you can set your limit order to be a day order where it’s only good until the end of the day. If it can’t be filled, it’ll simply disappear.
Additionally, you can set a limit order for other time restrictions such as a week or any set date in the future. But one of my favorite settings for a limit order is the fill or kill order. This places your limit order with the requirement that it be able to be immediately filled for your set limit or be canceled.
Stop-Sell and Stop-Limit Order:
In addition to market and limit orders, there are two other types that should be considered to manage your losses. The first is a stop-sell order. If an investor places a stop-sell order, a market order will be activated for the stock listed when/if the stop price occurs in the market. If, however, you want further control over the price, you can schedule a stop-limit order. The only difference is that the stop-limit order will activate a limit order (rather than a market order) when/if the stop price is listed on the market.
And that’s about it for order types. After reading this article, you should now be able to easily understand how to purchase or sell a stock with the main order types offered by your broker or exchange. While these aren’t the only choices available to you, these are arguably the most important (in my opinion) and they can be used in any number of different ways to give you a better chance at making your perfectly timed entry and exit into the market.
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Until next time,