If you’ve never purchased stock before, it can be a little confusing. At first, it seems like all you have to do is tell your broker to buy whatever company you want to buy. When it’s time to sell, just tell him to sell.
It’s not quite that easy. Why? Because there are several types of orders you can give your broker, and he’s going to ask you about them when you enter a transaction.
A Market Order
A market order is the most basic type of order you can execute.
It’s an order to buy or sell at whatever the current market price is. It’s not used in any advanced trading strategies for the most part, but rather by long-term investors who don’t mind the mild fluctuations in price between the time they place the order and the time it takes for the broker to execute the trade.
To minimize the risk that your order isn’t fulfilled in a timely manner, make sure you research your broker using http://www.brokerstance.com or a similar service before you agree to do business with him.
A Limit Order
A limit order allows you to set your own price limit. That means you have a lot of control over when you buy or sell the stock.
A buy limit order would only execute at or below your limit price.
A sell limit would only execute at or above your limit price.
This strictly controls the amount of loss you experience from poorly (or slowly) executed trades.
Stop and Stop Loss
If you’re concerned about losing money, but you don’t want out of the market just yet, set a stop order. A buy stop order allows you to buy into the market when the price of your desired stock hits a certain price. A sell stop allows you to cut your losses and retain profits if your stock declines beyond a specific set price. When activated, it becomes a market order, so you buy or sell at the current market price.
A stop limit works just like a stop loss except that it functions as a limit order instead of a market order when activated.
Let’s say you don’t want to sell off all of your shares at a specific price. Instead, you want dynamic control over when you sell. So, instead of a stop loss where you sell shares when they hit a specific price, you sell shares if they decline by a specific percentage or amount.
When you set a trailing stop to buy, the stop moves down as the value of the stock decreases and remains static when the stock price increases. With a trailing stop to sell, the opposite happens.
In both cases, the trailing stop works like a ratchet. It closely follows the price of the stock and then remains flat when the stock’s price reverses in the opposite direction. This acts to minimize the price you pay when buying in and minimize loss when selling.
Trailing Stop Limit
A trailing stop limit acts just like a trailing stop, but it’s triggered as a limit order.
Selling short means that you borrow a stock, sell it to someone else, deposit the money into your own investment account, and then later repurchase the stock at a lower price. It’s one of the most complex orders you can make, but it’s also one of the more profitable ones.
When you sell a stock short, you’re hoping the price of the stock will fall. The more is declines, the more you profit.
Let’s say you think shares in ABC company will decline. You borrow 1,000 shares from your brokerage firm and sell them. You deposit the money into your bank account. Let’s assume the shares were selling for £1 a share. That means you now have £1,000 in your investment account. The share price falls to £0.50. You buy back the 1,000 shares at £0.50 and give them back to your brokerage firm.
What just happened? Well, when you borrowed the shares, they were worth £1,000. But when you bought them back, they were only worth £500. Where did the remaining £500 go? Into your bank account – that’s your profit. The more the price tanks, the better you do.
It’s an order you execute only when you’re bearish on a particular stock. Think of it as the reverse of going long on a stock (i.e. buying a stock and holding it, hoping it will increase in value). If you don’t have experience with this type of trading, have your broker walk you through a few trades first before you go it alone.
Jarryd Harden has enjoyed trading for the better part for the last decade. His ideas and insights appear on various investment blogs.