Whether you’re investing in stocks or options, it’s important to understand order types, such as market orders, limit orders, and stop orders. By understanding how each works, it could save you a good amount of time, energy, and money.
The Market Order
A market order is an order to buy or sell a stock or option at the best, immediately available, price. These allow you to jump into a trade within seconds of clicking the buy or sell button.
According to the United States Securities and Exchange Commission: “This type of order guarantees that the order will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price.”
The Limit Order
The limit order is an order to buy or sell a stock or option at a specific price. With it, the executed trade will be opened or closed at a pre-defined price point.
If the stock or option fails to hit that price point, the trade will not open or close. For example, let’s say you wanted to set a limit order to buy Apple at $150 a share. The trade will only be opened if the stock’s price reaches $150 or better.
In short, it allows you to set a limit. It won’t allow you to trade a stock beyond a set price with a buy limit order, nor to sell below a specified price with a sell limit order.
The Stop Order
Stop loss orders are essential to limiting loss.
As I noted on September 10: “Think of it as an insurance policy that’ll protect you if the stock falls. Some traders use a -25% stop loss, for example. If the stock falls 25% from your buy-in price, the stop is triggered and the trade is over.”
The worst thing an investor can do is trade without protection…unless you’re okay losing money on a trade going against you.
Alternatively, you can use a trailing stop loss. As I also noted on September 10, “Let’s also say you bought shares at $147 a share, with a trailing stop loss of $10. Now, if the price of Apple moves to $157, the trailing stop would reset at $147, or $157-$10. However, if the price of the stock now falls, the stop loss price doesn’t change. It would stay at $147. Once that stop is hit, you’re out automatically. There’s no second-guessing. If your stock pushes higher, the trailing stop resets higher, too, never triggering until the stock drops.”
- A market order allows an investor to buy or sell a stock or option at current prices.
- A limit order will specify an exact price, where you want the trade to open or close.
- A stop order is used to stop a trade at a specific price. Trailing stops can also be used.
These are the key orders to be well aware of any time you open or close a trade. Again, by understanding how each works, it could save you a good amount of time, energy, and money.