Market Order (MKT) #
- A market order is simply an order that instructs the broker (or online trading platform) to buy or sell shares at the best available price.
- A market order does not guarantee the price you will get, but it does guarantee that you will get the number of shares that you want. When an order is completed, it is said to be filled.
- A market order is most often used in cases where the buyer or seller is most concerned with filling the size of the order and not concerned with the price.
You should only use a MKT order if you aren’t concerned about executing your trade for a certain price. A good example on when to use a MKT order might be during high volatility.
Limit Orders #
- A limit order specifies the price at which you want to trade.
- For example, you may specify that you want to buy AAPL for $140.00 but no more, in which case you would buy the 50 shares offered at $140.00 and then wait for some other seller to come down to your price.
Limit orders are the most commonly used order types and can ensure you get the best price you can when executing a trade.
STOP Orders #
- Stop orders are contingent on a certain price level being attained to activate the trade.
- With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price). Once the stock has reached this price, a stop order essentially becomes a market order and is filled.
- For instance, if you own stock ABC, which currently trades at $20, and you place a stop order to sell it at $15, your order will only be filled once stock ABC drops below $15. Also known as a stop-loss order, this allows you to LIMIT YOUR LOSSES.
- This type of order can also be used to guarantee profits (SAFE SELLING). For example, assume that you bought stock XYZ at $10 per share and now the stock is trading at $20 per share. Placing a stop order at $15 will guarantee profits of approximately $5 per share.
- One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price.
Types of STOP Loss Orders #
There are 3 main order types used for stop loss orders:
- Stop Market Order – A stop market order is a basic order type which issues a market order once a specified price has been reached, known as the stop price. Once the stop price has been touched or surpassed, the stop market order becomes a market order and will execute at the best possible price. Keep in mind that in fast moving markets, the best possible price might be much different than expected.
- Stop Limit Order – A stop limit order is similar to a stop market order, except that when the stop price is touched or surpassed, a limit order is issued. This gives you more control of where the order will execute but on the other hand, does not guarantee a fill.
- Trailing Stop – A trailing stop is a dynamic stop loss order which “trails” behind the price if it moves in your favor. Trailing stops can only move in one direction. For example, once a trailing stop has moved up, it cannot move back down. In this way, trailing stops are not just for preventing losses, but can be used to lock in profits for favorable trades.
A STOP Loss is a wonderful way to practice risk management. Remember it’s not how big the wins, but how little the losses.