Types of Stock Buying Orders
If you have already tried to buying shares in the past you may have been confused when you were asked what type of order you would like to place. While it may be annoying at first to be offered so many choices, taking advantage of the many types of orders can save a stock trader thousands of dollars if done right. Pay close attention!
A market order is the most common type of order when buying shares, but comes with some risk. Essentially a market order means you would like to purchase or sell a stock at whatever price you can get. So if you were selling stock XYZ and chose a market order, it would immediately sell at the best price currently being offered. If you were purchasing stock XYZ you would end up purchasing at the lowest price available to purchase the stock. The risk involved, especially with smaller stocks that trade in lower volumes, is that you may end up paying quite a bit more than you thought on on a buying order, and selling for less than you hoped on a selling order.
Most of your trades should be through limit orders. Essentially a limit order means you set a certain price that you are willing to purchase or sell shares of a stock at, and if shares ever become available at your limit price, the transaction will be made. This is especially useful for stock traders who use technical analysis and find exact points on their charts that they want to buy and sell shares at. If you are planning on holding a stock for a short amount of time it is recommended to set a sell limit order at a price you hope to sell your shares at. Occasionally you may get lucky and see the price of your stock spike for a few moments and fill your order.
Stop Market Order
A stock market order gives you the ability to limit your losses, especially if you are not planning on paying extremely close attention to the stocks you have in your portfolio. Essentially this type of order will allow an investor to set a certain price when buying shares for a stock, and if the current price ever drops below their “stop” price, their shares will immediately be sold through a market order. The reason for this type of order is to limit your losses. Let’s say you purchase stock XYZ, (this stock is purchased quite often in this lesson) and you are worried that some news could cause the price to drop significantly. A smart trader would set their stop limit at a certain price, limiting their losses to an amount they were comfortable risking. The downside of this type of trade is that while you are limiting your losses, you are also guaranteeing that you have losses. Often times if a stock trader can hold through a few bad days the price of their stock will rebound and money can still be made. It is possible that you will sell right before the stock begins climbing again, and you are now buying high and selling low – never a good thing for an investor.
Stop Limit Order
As you can probably guess, a stop limit order is just like a stop market order, except you set the stop price that will then trigger a limit buy or sell order. For example, if you had a stop limit order to sell stock ZYX and your stop price on was $5, your order would trigger if the price of the stock ever hit $5. It wouldn’t sell at $5 however, it would sell at whatever price you set your limit to (assuming you can find a buyer at that price).
Good Till Cancelled Order (GTC)
This type of order means that you would like your order to stay open until you physically cancel it. Most brokers have their default settings set to cancel your order at the end of the day to avoid investors forgetting they have an order and making an inconvenient buy or sell. These are useful if you plan on buying shares and holding them for long periods of time, but would be willing to sell if the price of your stock reached a certain level quicker.
All or None (AON)
This order means that you are only will to go through with the transaction if it happens to your desired number of shares. Say you wanted to buy 400 shares of XYZ at $5. Another investor was willing to sell their shares of XYZ, but only had 100 shares to sell. With an AON order you can guarantee you won’t pay broker fees for a tiny number of shares.