The two most common types of orders that you may place with your broker are Market and Limit. In addition your may enter a Day Order which will remain in effect only for the current day or a Good till Cancelled Order which normally remains in effect for 30 days or until you cancel it. It is recommended that you only enter day orders unless there is some special circumstance that would require you to enter a good till cancelled order
Market Order
A Market Order will be executed automatically at the current bid or ask price. If you enter a market buy order it will be executed at the current Ask Price when your order reaches the floor of the trading exchange. If you enter a market sell order it will be executed at the current Bid Price when your order reaches the floor of the trading exchange. A Market Order almost always insures that your order will be executed although the actual price at which your order is filled may be better or worse than you expected.
Limit Order
Another type order allows you to specify the most you are willing to pay when buying or the least you are willing to accept when selling. This is known as a Limit Order. For instance if you enter a limit buy order at 53.21 you will only pay 53.21 per share (or less) for your stock. If you enter a market sell order at 54.16 you will only sell for 54.16 (or more) for your stock. Because of the potential price differential with the bid or ask price, you order may not be executed.
When entering a limit order it is suggested that you specify a price somewhere halfway between the bid and ask price. When closing out a position because you think the price is ready to reverse, always enter a market order.
Stop Loss Order
A Stop Loss Order allows you to specify a Trigger Price for a stock you own. Once the stock drops to (or below) your Trigger Price, the order becomes a Market Order and will be sold at the best price available (even if the stock price turns back up). This is a way to protect yourself from a sudden decline in price for a stock you own or to protect your potential profit if the price has gone up since you bought it. Many investors use the Stop Loss Order as insurance against an unexpected price decline.
About Bid and Ask Prices
The Bid Price is the highest price anyone is willing to pay for a particular stock at the moment. The Ask Price is the lowest price anyone is willing to sell a particular stock for at the moment.
If you enter a Market Order to buy a stock you will pay the Ask Price when your order reaches the trading floor. This could be a good bit different from the Ask Price when you placed the order. On a fast moving, thinly traded, or volatile stock these prices can and will change very rapidly. You could pay substantially more than you expected! If this is a major concern, you may want to place a Limit Order instead.
Harry Hooper has over 30 years experience in portfolio management. He is the senior stock tracker for www.stock4today.com. |
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