1 Decision You Need to Make Before Making a Trade
Before you make a trade, you need to place an order. But there are many different types of stock orders.
Which should you choose?
To make smarter decisions as an investor, it’s important to educate yourself on the different types of stock orders.
Knowing and understanding the different stock order types will not only help you determine when each one is appropriate, but it can actually help reduce losses and potentially improve profits.
In this article, I’ll cover some of the key types of stock orders, and how they can best be used to maximize your trading potential.
What are Stock Orders?
Before we go into the different stock order types, let’s just take a sec to define what a stock order is…
Basically, a stock order is your instructions to the broker to how you want to buy or sell a security.
However, there are many specifications that can be put on that order. Think about it like going to the coffee shop, where you can ask for soy milk, light foam, or assign any number of different personalizations to your latte. Only here, you’re tailoring it to your investment needs.
There are different order types which let you as the investor place restrictions on the order which can have an effect on the price, and the time of the order placement.
By choosing the appropriate order type and adjusting these restrictions, you can try to control the profit and loss on the transaction.
In some cases, you can adjust the settings so that the order will only be placed if it fits certain criteria that you have set.
Now that you have a basic understanding of stock orders, let’s dig deeper into some of the considerations you’ll keep in mind when choosing one.
While it might sound like a sci-fi movie title, time horizon is actually a stock market term, and it’s relevant to stock order types.
Time horizon is the amount of time you’re holding an investment before you liquidate it.
In the case of a day trader, this can be for a very short time — sometimes mere seconds or minutes.
For a longer hold, such as a buy-and-hold position in a mega cap company that you’re counting on as part of your retirement plan, it might be years or even decades.
The time horizon has everything to do with your goals.
Before you consider any type of investment, you should familiarize yourself with the time horizon common for it. For instance, if you’re investing in a penny stock, you shouldn’t expect to be holding on to it for months or years.
The time horizon can help you chose a level of diversity and allocation that works for your portfolio.
Various things can affect time horizon. For instance, if you’re a day trader in your 20s, your time horizon might be different than someone who is in their 50s and nearing retirement.
Life factors can come into play, too. If one of your biggest goals is to save for a down payment on a house or investment property, you might have a different time horizon than someone who doesn’t have a forthcoming investment or immediate goal.
Your personal risk tolerance also plays a role in what types of stock orders you choose.
There are several different types of risk tolerance, including conservative/risk averse, moderate, and aggressive, with many points in between.
It may be helpful to get clarity on your risk tolerance level, so that you can begin to make the most appropriate choices for you.
The stock market is never a one-size-fits-all model: A big part of the work as a trader is developing a style that works sustainably for you over time.
Stock Order Types: Examples
Ready to learn about the different types of stock order types? Here are some of the key types that you’ll see, including an explanation of each and when they might be used.
Buy or Sell With a Market Order
With a market order, you’re placing an order to buy or sell right now. Market orders can be used to buy or to sell.
A market order is simple in that you are, without a doubt, definitely placing and executing the order.
However, there is no defined price. Just because an amount is listed as the most recently traded price, it doesn’t mean that you’ll get exactly that price.
You’re basically buying into the current market price. So, if you were working with your broker, you might say, for example, “buy 100 shares of X at the current market price.”
For a sell order, the price usually goes off at or close to the current bid price. For a buy order, the price usually does the same. However, it’s not totally guaranteed.
Online, a market order will be executed nearly instantly.
However, even nanoseconds can have an effect on the price of the stock, so even if you looked at the price moments ago there can be variance in what you pay or make from the sale. This is particularly true if there’s a lot of volume around the stock.
In general, you can expect that with a market order, you’ll pay the highest price out of all the sell orders on the table, and you’ll get the lowest price out of buy orders.
When to Use Market Orders
As a trader, you know that entry and exit matters a lot. So with the fact that you’re not guaranteed a price, when should you consider a market order?
Here are some times when it makes sense:
If you want to buy in fast. If you really want to get into a trade and speed is more important than price, a market order might fit the bill. However, be aware that it can be a risky tactic to be so desperate to buy a stock based on a hot tip or something that you need to have it right now.
If you want to cut losses. If you’re stuck in a hard position with a stock and you want to cut losses quickly, you can use a market order and get out ASAP.
If the range is narrow. If there’s not a huge amount of movement with the stock, then a market order is less likely to vary dramatically from the ask bid or sell price, so it’s not as much of a worry.
Tomorrow I want to go over some important details about limit orders.
It’s important information you won’t want to miss.
Editor, Penny Stock Millionaires