Are you familiar with the four types of orders that traders commonly use to enter their trades? There are market orders, limit orders, stop orders, and stop-limit orders. Understanding the differences between these order types can help you increase your returns.
Market Orders – A market order is an order to buy or sell a certain number of shares of stock at the current market price. As long as the market is open, a market order will generally be executed within seconds. A market order to buy stock will be filled at the ask price and an order to sell will be filled at the bid price. Unless the market is running up or down at an unusually rapid pace, the fill price will be very close to the price quote you received just before placing the order. Now that online stock trading is available, you can enter a market order, have it executed, and receive a report back of the actual fill price all in less than a minute. If you are an active trader you will appreciate the speed at which market orders can get you into or out of a stock.
Limit Orders – When you place a limit order you are able to set the exact price at which you want to buy or sell. Limit orders can be used for either buying or selling stock. A buy limit order will not be executed until the price of the stock is either at the limit price or below it. A sell limit order will not be executed until the price of the stock is at the limit price or above it. In other words you will get the price you specify or better. A limit buy order is commonly used to prevent the possibility of paying more than you want for a stock that is moving up in price quickly.
Stop Orders – A stop order is an order that will automatically become a market order once the stock hits a specified price. Stop orders are commonly used to protect profits after a trade has moved solidly into the black. If a stock you have purchased has moved up in price, a stop price can be selected that is at a point somewhere below the price at which the stock is currently trading. Then, if the stock falls to the stop price it will automatically be sold, even if you are off playing golf. Stop orders cannot be placed for all stocks.
Stop-limit orders – A stop-limit order offers the trader even more control over a stop order. Because a stop order turns into a market order once the stop price is reached, there is the possibility that the trade may not be executed until the price has travelled quite a distance. This could happen if the stock is the subject of a news story which sends the price up or down rapidly. A trader can protect himself from that situation by the use of a stop limit order. A stop limit order converts to a limit order once the stop price has been hit. The trade will be executed at the limit price or better. The disadvantage of using a stop limit order is that there is more of a chance that the order will not be filled at all. This can happen if the stock is moving rapidly and there isn’t enough volume to fill all requests at the limit price that was specified.