Trading and Types of Orders

Category: Investment Life Our Blog

When buying and selling a stock on your portfolio you will have several options. While this may look complicated, it is actually quite simple, and you will get used to it with just a few trades.

Inside our App you’ll have the option to either buy or sell a stock, including the short-sell and buy-to-cover options which only apply to short positions and will be discussed at another time.

First, when selecting to buy or sell a specific stock your first decision to make is related to the type of trade known as “order”. Most common ones are “market orders”, “limit orders”, “stop orders” and “stop-limit orders”, however, “market orders” are most widely used.

Let’s talk a little bit about these orders.

Market Orders

If you want to execute an order immediately and buy the stock at the current price, this is called a “market order”. This type of orders is most common when you want the order to be fulfilled as soon as possible. You could either use a market order to open (buy) or close (sell) a position (stock). So, if you choose a market order, the trading platform will either buy or sell the stock on the first available price (usually less than a second).

Limit Orders

Now, if you want to buy or sell a stock at a specific price then the appropriate strategy will be to select “limit order”. For example, suppose you want to purchase ABC stock. Now imagine it is currently quoted at $20. However, you think it will be a profitable position only if the price falls to $15 therefore you place a limit order to buy at $15. This way the order will only execute if the price drops to $15 or below. Remember your risk is that it may never reach that price and you lost an opportunity buy.

If you are doing the opposite, meaning selling a stock that you currently own, then once the stock reaches a predetermined price (higher than the current price), a limit order to sell is the right strategy. For example, if you believe ABC stock will begin an upward move from the current price of $20, then a limit sell order could be set at $22. If the stock begins to rise, as soon as it reaches the $22 quote, an automatic sell order will be placed. Remember again, your risk is that it may never reach that price and you lost an opportunity to sell.

Stop-Loss Orders

A “stop order”, also referred to as a stop-loss order, is an order to sell a stock once the price of the stock declines to a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order, therefore executing immediately.

For example, let’s say you just purchased ABC stock at $20. Right after buying the stock you enter a stop-loss order for $18 to limit your loss. If the stock falls below $18, your shares will then be sold at the prevailing market price limiting a further loss.

Stop-Limit Orders

Lastly, if you want a more advanced stop order you could use a “stop-limit order”. Using this order will give you the chance to establish a stop order that, after being triggered, will become a limit order.

Using our example, assume ABC stock is trading at $15 and you want to buy the stock once it shows serious upward momentum. In practice, you place a stop-limit order to buy with the stop price at $20 and the limit price at $22. If the price of ABC climbs above $20 (stop price), the order is activated and turns into a limit order. As long as the order can be completed under $22, which is the limit price, the trade will be executed. If the stock gaps above $22, the order will not be completed.

Day and GTC Orders

Furthermore, on all this orders you could establish the time horizon on which you expect the order to remain valid. You can choose a “Day Order”, and it will get canceled at the end of the trading day if the conditions were not met. Otherwise, you can choose a “Good-Till-Cancelled” (GTC) if you want the order to remain active until the stock reaches the desired price.

At the end of the day you will see that there is no strict rule on how and when to use these orders. It will always depend on your choice and preferences at a given moment or situation.