The 13 Primary Types of Stock Order
After you’ve chosen a stockbroker, you are going to want to begin trading shares. Before you do that, you should learn the 13 types of trade orders you can place online and the circumstances under which you would use them. You may not use all of these types of order, but you never know. It’s good to be aware of the full range of choices you have at your disposal. Imagine you want to buy 100 shares of Apple. If the stock is trading at $181 when you place your market order, you shouldn’t be surprised if the price you pay is a bit more or less than that, maybe $181.50 or $180.60. Imagine you want to buy shares of U.S. Bancorp. You believe the stock is overvalued at its current price of $53.48 and you don’t want to pay more than $51, so you place a limit order set to execute at $51 or less. If the stock falls to that price, your order should be executed. There are three considerations you should take into account before placing a limit order:
The stock price may never fall (or rise) to the limit you’ve established. As a result, your order may never be executed.Limit orders are executed in the order in which they are received. It is possible that the stock you are interested in buying (or selling) will reach your limit price yet your trade will not be filled because the price fluctuated above (or below) your limit before the trade could be carried out. This problem is far less common now with online trading than it was when people used to call their broker to place trading orders.If there is a sudden drop in the stock price, your order will be executed at your limit price. Imagine the bank’s CEO resigns unexpectedly or some other type of bad news is reported, and U.S. Bancorp’s stock drops to $45. As the stock was falling in price, your order was executed. You are now sitting on a loss of $6 a share.
A stop order automatically converts into a market order when a predetermined price—the stop price—is reached. At that point, the ordinary rules of market orders apply: the order is guaranteed to be executed, but you won’t know the price. You enter a short sell order for 1,000 shares, borrowing the $12,500 worth of shares (1,000 shares x $12.50 each), selling them on the open market, and collecting the cash. If the stock price does indeed fall, you can use the next type of order to complete your short sale and make a profit. Your buy to cover order would repurchase the 1,000 shares for $10,500 and return the borrowed shares to your online broker. Because you bought the shares for $2,000 less than you sold them for, you will have made a $2,000 gain. Here are a few important rules regarding short selling:
In order to sell short, you must have margin privileges in your brokerage account. That means you can trade with more money than you have in your account if you wish. You must maintain enough purchasing power in your account to carry out a buy to cover order on your short sale. If the price of your shorted stock increases and you don’t have enough money in your account to buy the shares back at the higher price, you will face a margin call—a demand by your broker to put more cash or securities in your account to be able to cover the trade.
Day orders are in fact just what their name implies: they are good only until the end of the regular trading day—4:00 p.m. Eastern time—at which point they are canceled. All market orders are placed as day orders. There are risks in using these orders:
You may forget you placed the order.If you place a large trade with GTC status, you may pay a commission each day your order is partially filled. If, on the other hand, your order is filled by multiple transactions in a single day, your broker should charge you only a single commission.
Imagine you purchased 500 shares of Coca-Cola at $50 per share. The current price is $58. You want to lock in at least $5 of the per share profit you’ve made but wish to continue holding the stock, hoping to benefit from any further increases. To meet your objective, you could place a trailing stop order with a stop value of $3 per share. If the stock price does what you had hoped it would do, your order will sit on your broker’s books and automatically adjust upwards as the price of Coca-Cola’s common stock increases. At the time your trailing stop order is placed, your broker knows to sell your shares if the stock price falls below $55 ($58 current market price - $3 trailing stop loss = $55 sale price). Imagine Coca-Cola increases steadily to $62 per share. Now, your trailing stop order has automatically kept pace and will convert to a market order at $59 ($62 current market price - $3 trailing stop loss = $59 sale price). That would provide a gain of $9 per share. Going back to our Coca-Cola example, let’s now assume you placed a bracketed order with a trailing stop level of $3 per share and an upper limit of $65 per share. The bracketed order will behave the same as the trailing stop order, with the $3 trailing stop automatically ratcheting up as the price increases. The only difference is that if and when Coca-Cola hits $65, the bracketed order will automatically convert into a market order and will be immediately executed.
