To start trading one has to make an order. But why are there so many order types? What are them? Which type is to choose under certain conditions? To make deliberate and effective decisions investor must educate himself on all the different stock order types.
This type of order will execute at the first available market price. Consequently, you can not guarantee your execution price. You can only guarantee that the trade will be executed. This could be risky business with any trade but particularly so when you trade stocks with a low trading volume. A low trading volume usually means a wider bid-ask spread and it’s difficult to ensure that the price will be close to the current last sell price that you know of. The actual price that your order gets executed at may, therefore, come as a surprise. Whether it’s a good one or not, being a savvy investor you want to be able to control how much money you invest. Hence, a Market Order is almost always best to avoid.
This type of order is usually the default for all trade executions. It’s recommended to use a limit feature when placing an order so that you are in better control of the execution price.The Limit Order type will ensure you that the price does not execute outside of your limits; however, it does not guarantee that the order gets executed at all.When you input a sell limit order, you set the lowest price you are willing to sell the stock at. The trade will only be executed at the limit price or better. Conversely, a buy limit order states the highest price you are willing to pay for a stock and will not execute until the market price falls to that level or below.
Sell Stop Order (also referred to as Stop-Loss order)
This type of order is used to limit the downside risk of a stock. It guarantees the sale of a stock at a certain price. A stock price that is heading south may indicate a continuing downward trend that you don’t want to participate in. The stop price is set at a price lower than the current market price. When and if the current price reaches the stop price level, the sell order gets triggered and becomes a market order.
Buy Stop Order
This type of order is used to prevent the current market price from reaching a higher level than what you are willing to pay for a stock. A rising stock price may be an indication of a steady upwards trend that you don’t want to miss out on. In that case, you want to make sure you get in on the stock before the price reaches too high. The buy stop order price is set at a higher price than the current market price and the order gets triggered when and if the market price reaches the stop price.
Stop Limit Order
This type of order is similar to the Sell Stop Order and Buy Stop Order but its difference is the added limit order feature. When the Sell or Buy Stop Limit order gets triggered at a specific stop price, it turns into a limit order instead of a market order. Consequently, when placing a Stop Limit Order you need to decide on both a specific Stop price for the order to be triggered at, as well as a Limit price of the highest price you are willing to pay or the lowest price you are willing to sell at. This order type does not guarantee execution but it does guarantee that the execution price stays within certain limitations.
Trailing Stop Order
This type of order adjusts the trigger price according to movements in the market price based on a specific trailing parameter you have determined. It has the same features as a basic Stop Order, however, a Trailing Stop Order also allows you to take advantage of potential up-and-down movements before the market price reaches the stop price. Say you enter a Buy Trailing Stop order at $60, trailing amount $1 when the current market price is $59. Right after you input the order, the market price moves down to $58.50. Since you entered a trail amount of $1, the stop price will adjust accordingly to $59.50, ensuring that your stop price adjusts to the positive market movement. If the market price then starts moving back up towards your stop price, the price will not adjust and it will stay at $59.50.
A trailing stop price only adjusts with positive movements to ensure the best possible execution price. The trailing amount can be set in both dollars and percentage amounts.
This type of order buys or sells at a limit price at the opening of any given trading day. If the opening market price is within your limit price, the trade will execute.
This type of order buys or sells at the opening market price of any given trading day.
This type of order buys or sells at the closing market price of any given trading day.
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Updated : 2019