Learn the Stock Market Lesson – Types of Orders
There are 3 main types of orders: limit, market, stop
The purpose of different types of orders is so that you can be more specific about how you would like your trades to be executed.
1) Market Order – Your buy or sell order is filled immediately. The execution is guaranteed but the price is not since slippage can occur. However, some people might not want a stock at the current trading price because they want to wait for the stock price to move in a certain direction before they move in, which is why they place a limit or stop order.
2) Limit Order – You control the price by setting a maximum or minimum price that you are willing to buy or sell a stock. The advantage of a limit order is that it guarantees the trade at a specific price but you risk not getting your order executed if your limit price is not reached.
Example : If a stock is trading at $20 but you only want to pay $10 maximum, you can set a limit price for $10 so that if the stock drops to $10, your order will be executed. Likewise, if you own a stock that is trading at $15, but you want a higher profit and sell it at $20, you can place a limit order to sell it at $20. Of course, if the stock does not rally up to $20, your order to sell does not get executed.
- 4 types of Limit Orders:
- Limit Buy Order – Will only be executed if the price is at the limit price or less.
- Limit Sell Order – Will only be executed if the price is at the limit price or higher.
- Limit Sell Short Order – Will only be executed if the price is at the limit price or higher.
- Limit Cover Short Order – Will only be executed if the price is at the limit price or less.
3) Stop Order – You set stop orders if you want your trade to only be executed when the stock reaches a particular price. When the stock reaches the stop price, it becomes a market order and the execution is filled. Many people use this order to set a stop-loss, which limits your losses.
Example : Stop-loss - If you own a stock that is currently trading at $10, you can set a stop order to sell at $5, which would be filled if your stock does happen to drop to $5. Stop-losses are especially advantageous to people who cannot watch their stock for a period of time and want to limit their losses.
- 4 types of Stop Orders:
- Stop Buy Order – Will be only executed if the price is at the stop price or higher.
- Stop Sell Order – Will be only executed if the price is at the stop price or less.
- Stop Sell Short Order – Will be only executed if the price is at the stop price or less.
- Stop Cover Short Order – Will be only executed if the price is at the stop price or higher.
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