Order Types Lesson

Order Types Lesson

Before you can buy and sell stocks, it is essential you know the different order types and when each is appropriate. The two most basic types of orders every investor/trader should be aware of is the market order and limit order.


A Market Order is an order that buys or sells the stock immediately at the best available price. These orders do NOT guarantee a price, but they DO guarantee immediate execution.Typically, if you're buying a stock, you will get a price near the posted ask. If you are going to sell a stock, you will receive a price near the posted bid. A VERY important aspect of a market order is that the last traded price is not necessarily the price you will receive. In fast moving, volatile markets, market orders are seen as more dangerous because your trade can get filled at a price nowhere near where the stock is currently trading.


A Limit Order is where you place a bid (to buy or cover a short) or an offer (to sell short or close out a long position) at a price you choose. The main difference in a limit and market order is that a limit order does not guarantee you will get filled your stock



Stop Order - This is also referred to as a Stop Loss or Stopped Market, this is one of the most useful orders. This order, unlike limit and market orders, remains dormant until a certain price is passed, which activates it as a market order. This helps you define your risk. Whenever you buy or short a stock, you should immediately set your appropriate stop in order to quantify your risk. It is essential you always use stops. This gives you protection to a large downside move.

Example: I want to buy XYZ at $30 and give it $1. I then buy the stock at $30 and set my SELL STOP to $28.99.


I want to short XYZ at $50 and give it $1. I then short the stock at $50 and set my BUY STOP to $51.01.


Good 'til Canceled (GTC) - This is a time restriction that you can place on different orders. A GTC order will remain active until you decide to cancel it. Brokerages limit the maximum time to keep an order open to 90 days.

There can also be GTC intraday orders, which cancel upon the market's close.


All or None (AON) - An all-or-none order ensures that you get either the entire quantity of stock you requested or none at all. Pretty simple. This is typically problematic in thin, illiquid stocks.

 

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