In your brokerage accounts you’ll usually see 5 order types: Market Order, Limit Order, Stop-Loss, Stop Limit, and Trailing Stop. I show how each order type can be applied with an example stock.
Don’t Worry About All The Order Options Or Volatility
Bid & Ask Spread
Stop Limit Order
Trailing Stop Order
Time In Force Conditions
Placing a market order or limit order is a similar experience to what we might encounter in our everyday lives. Like when you’re at a garage sale or yard sale and you negotiate with the seller’s market price on goods by countering with your limit price.
The main order types represent the what and how you can buy or sell stocks in your brokerage account, while the time in force condition is when you want to buy or sell a stock.
Most people will usually only need to use either market or limit orders if you’re a buy-and-hold long-term investor. The other order types tend to give flexibility to traders who tend to take short-term actions.
The market order is the main one many people will use if they do not mind whatever price the market gives them, within range of the bid and ask prices a stock is trading at. It is executed immediately when the market is open and takes priority over limit orders.
You should use brokerages that give you the best execution quality, both in terms of how long it takes for the order to go through (time) and the price you’re paying per share. Some popular brokerages can execute the order in as low as 0.05 seconds and some as long as 0.39 seconds. Some brokers strive for “price improvement,” which is getting you the best price for any security you buy or sell.
With limit orders, you’re telling the market you only want to buy or sell at a specific price, and if it doesn’t meet it, then you don’t want to have any action taken. If you place an order and the market rapidly gaps up or down way past your limit price, you are not guaranteed to fill your order.
Unlike limit orders, stop or stop-loss orders cannot be seen by the market and with this order type you can give the market a “stop” price where you want a market order to be activated and either buy at or above the stop price or sell at or below the stop price.
The difference between stop/stop-Loss and stop limit is that the former is a market order and the latter is a limit order with the stop price involved. So when a stock hits the stop price, you want the order to be activated and either buy or sell at your specified limit price.
The trailing stop order is a modification of either a stop-loss order or a stop limit order by setting a certain dollar ($) or percentage (%) amount. These orders move with the current market price of a stock and move in one direction as they are designed to lock in profits or limit losses. A trailing stop order tends to be more flexible than a fixed stop-loss order.
Finally, I explain the various Time In Force conditions, and most people will use Day orders but you can also use Good Til Canceled (GTC) for some extended amount of time.
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