Stocks – Understanding order types

Stocks – Understanding order types

Stocks – When trading stocks, when you are about to enter a trade rather buy, sell, or short stocks, a list of different types of orders comes up. Before we go on you have to understand what a Bid and Ask (offer) price is. The bid price is the price the buyer is willing to pay for the stock.

Kind of like at an auction, the maximum price a buyer is willing to pay. The Ask price is the price a seller is willing to sell the stock for.

The minimum the seller will take for the stock. Both the bid and ask prices fluctuate by seconds since there are lots of trades happening at the same time all around the world.

Example: If you are trying to sell your car, you as the seller are going to “ask” a price, as a buyer they are going to “bid” the price they are willing to pay.

Stocks
  • Market orders – When you place a market order you do not care what price it is, you want to buy, sell, or short the stock right at that moment. If you are buying the stock you will be paying the Ask price of the stock. If you are selling the stock you will be receiving the Bid price. This guarantees the execution but does not guarantee the price. Best available price at that time.
    • Basically saying you will buy that car for whatever the price is asked at that time
    • If you are selling, it is saying you will sell that car at whatever the price you can sell it for at that time
  • Limit orders – When you want to specify the price. It guarantees a price but does not guarantee execution (buy, sell, short).  When you go buy a car and you tell them you are only going to pay $10k, that is a limit order.
    • Buy limit order – It will trigger to buy only when it hits the limit price or better (or less). If a stock is at $100 you put in a limit order for $95, it will only buy at $95 or less
    • Sell limit order – It will trigger to sell only when it hits the limit price or better (or more). If a stock is at $100 you put in a limit order for $105, it will only sell at $105 or higher.
  • Stop orders – Sometimes called stop loss orders are used to protect an existing position. It will activate when the stock price hits or past the stop price then will execute an order at the next price. Could set a stop order below a support level (will discuss support and resistance levels later). Because it executes an order at the next best price after the order has been activated you could lose money in slippage. 
    • Sell stop order – It is used when you own a stock and it’s at $100. If you don’t want to lose any more than $5 so you put in a stop order at $95. If the stock goes down to $95 it will sell as a market order.
    • Buy stop order – If you are shorting a stock and you shorted the stock at $100 and you don’t want to lose any more than $5 you will put in a stop order at $105. If the stock goes up to $105 it will trigger and buy at market order.  
  • Stop limit – This is a combination of a stop order and limit order. With a stop limit, you will set a specified price that you want it to execute at. Since stop orders are executed at the next price after the order was activated you could potentially lose a lot of money in slippage. Like Limit orders, there is no guarantee it will be executed. 
  • Trailing stop – This is similar to a stop order except it is set at a defined percentage or dollar amount away from the current market price. The trailing stop will not activate as long as the stock price does not fall below the set percentage or dollar price from the peak price it will not be executed. So the trailing stop follows the stock price. If the stock is trading at $100 and you buy into it, as the stock goes up to $200 you put in a trailing stop for $10, as long as the stock is going up it will not be activated, if the stock starts to come down as long as the price stays within the $10 threshold it will not be activated. So the stock can come down to $209 it will not be activated. The stock goes up to $250 then comes down past $240 which then will activate the trailing stop since it passed the $10. When shorting the stock it is the opposite.

Stocks and understanding order types Conclusion

Understand that even when you set a price on various order types and the price hits those price points, your order may or may not get filled, depending on volume and timing. Also, there may be times that you put in an order to sell but may or may not get filled or may get filled at a much worst price than expected due to selling volume being high. In conclusion, prices are not guaranteed, and the execution of your orders are not guaranteed. It is always a good idea to monitor your trades.

Disclaimer: We are not financial advisers and this is our personal opinions and is for educational purpose only. Understand that when you invest in stocks or any other assets there is risk and you may or may not experience loss. Please make sure you understand before investing.

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