As the number of investors who prefer to use an online-based broker for their trading increases, it often means they need to know exactly what type of buy or sell order they wish to place. You can use a variety of buy or sell orders to gain greater control over the trade compared to a simple market order. Some orders restrict the trade in terms of price, while others restrict the trade in terms of time. Let’s explore some of these orders, which work whether you’re dealing with an online broker or a real person.
Market Order
A market order is the simplest and quickest way to fill your order (or complete it). A market order instructs your broker to buy or sell stocks immediately at the current price, regardless of its value.
If you’re watching the market, you might get the last listed price or you might not. In a volatile market, you are likely to get a price close to that, but there is no guarantee of any specific price.
Example: The order may be priced at 12.20 bid (200 shares) / 12.25 ask (500 shares). If an investor places a market order to sell 3000 shares, the 12.20 bid for 200 shares will be filled, then the next best price will be filled. It is difficult to determine what the next price will be without looking at the order book. This is particularly dangerous with thinly traded securities like small-cap stocks.
Limit Orders
Limit orders instruct your broker to buy or sell a stock at a specified price. The buy or sell won’t be executed until you get the price you want, in other words, there is no guarantee of execution.
Limit orders give you control over your entry or exit point by specifying the price, which is beneficial.
Stop Loss Orders
A stop loss order gives your broker a price indicator that protects you from a significant drop in the stock price. For example, you can place a stop loss order at a point lower than the current market price. If the stock drops to that price point, the stop loss order becomes a market order, and your broker sells the stock (remember that a market order does not guarantee a price, so you may not necessarily get your stop loss price). If the stock remains at the same level or rises, the stop loss order does nothing. Stop loss orders are a cheap insurance that protects you from loss.
Example: This example highlights a stop loss order for selling, used by traders who own stocks. For traders who are short-selling stocks, they will use a stop loss order to buy.
Trailing Stop Orders
A trailing stop order is similar to a stop loss order, but you use it to protect profits instead of protecting against losses. If you have a profit in a stock, you can use a trailing stop order to follow it. You enter the trailing stop order as a percentage of the market price. If the market price drops by a certain percentage, the trailing stop order becomes a market order, and your broker sells the stock. If the stock continues to rise, the trailing stop order follows it because it is a percentage of the market price. This protects additional profits.
Example: Like the stop loss example, this example covers sell orders for traders who own stocks. Traders who are short-selling assets will place trailing stop buy orders. Also, as with stop loss orders, the order that is executed is a market order, so there is no guarantee of the execution price.
Good Until Canceled
A good until canceled order instructs your broker to keep the order active until you cancel it. Of course, you use this order with other types of orders to define a time frame for the order. Some brokers have restrictions on how long they will keep a good until canceled order.
Order
Today
A “today” order is any order that is not valid until canceled. If your broker does not execute your order that day, you will need to re-enter it the following day.
All or Nothing
An “All or Nothing” order means you want to fill the order in its entirety or not at all. You can use this type of order for stocks that trade thinly.
Conclusion
You may find that these orders are called slightly different names at some brokers, but the concept will remain the same. The most useful orders are market orders, stop-loss orders, and trailing stop orders. Other orders are good to know, but you may not use them often.
Source: https://www.thebalancemoney.com/understanding-stock-orders-3141318
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