After you've chosen a stock broker , you are going to want to begin buying investments such as stocks, bonds, mutual funds, or exchange traded funds. Before you can do that, however, you're going to need to learn the twelve types of trades you can place and what they mean so you don't make a big and potentially expensive mistake.
Terms like "market order", "limit order", "trailing stop loss", and "bracket order" may sound complicated but in reality, they are simple concepts that you can understand with just a little bit of work. It's best to think of them as tools in your stock trading arsenal. For instance, if you want to put in an order that will keep following a stock price as it rises so you don't lose any upside, but sells your stake if the market starts to crash, you can do that.
If you want to buy shares and put in an order at a predetermined amount below a specific price so you limit your losses, you can do that, too. Please note that these trades are meant to be used in the context of a disciplined, long-term investment strategy, not for the purposes of short-term or day trading.
You shouldn't engage in any stock trading unless you understand what you are doing and you've sought the counsel of a professional, well-respected financial planner. The simplest and most common type of stock trade is a market order. Market orders simply tell your broker that you are willing to take whatever price is presented to you when your order is executed. These orders are often subject to the lowest commission since they are the easiest to execute.
Imagine you want to buy shares of Apple Computer, Inc. Your cost before commissions will vary accordingly. A limit order allows you to limit either the maximum price you pay or the minimum price you are willing to accept when buying or selling a stock. The primary difference between a market order and a limit order is that your stock broker cannot guarantee that the latter will be executed. Imagine you want to buy shares of U. If the stock falls to that price, your order should be executed.
To protect yourself from sudden market shifts, many professionals recommend that all stock trades, whether you are buying or selling shares, be placed as limit orders. At times, however, you may want to place an order at a single price. This can be an efficient way to place your order while ensuring a minimum amount of bookkeeping; always a consideration if you are managing a larger portfolio with several hundreds of thousands, or millions, of dollars in equities.
The solution is to place an all-or-none trade. All-or-none trades essentially tell your broker that you do not want your trade executed unless he can do so in a single transaction. The minimum qualification for an all-or-none trade is three round lots or more shares. Besides the usual caveats, there are some additional considerations before placing an all-or-none order:.
Contrast that to a stop limit order , which automatically converts into a limit order not a market order when the stop price is reached. As discussed earlier in this tutorial, your order may or may not be executed depending upon the price movement of the underlying security. As you learned in The Basics of Shorting Stock , selling short is an extremely speculative practice that can, theoretically, lead to unlimited losses.
It can also allow you to profit from a stock falling. You think that Company ABC is grossly overvalued. Management is terrible, financial condition is deteriorating, the sales outlook is pitiful, and, you believe, the stock price does not fully reflect these apparent realities.
The buy to cover order is not the same as a regular market order; it effectively returns the borrowed shares to your broker and must be used to close your short position.
When you place an order, you must give it an expiration date. Day orders are good until the end of the trading day, at which point they are canceled; all market orders are placed as day orders. Good-till-Canceled GTC orders, however, remain open until one of three things occurs:. The extended hours market allows you to place trades between 8 p. This system permits investors to react to corporate announcements and news prior to the next session.
There are a number of risks associated with extended hours orders; primarily an increase in volatility as a result of decreased liquidity.
Any time there are fewer shares trading hands, stock price movements larger because buy and sell orders have a disproportional influence upon the quoted value. As a result, the price you pay for an extended hours trade can differ substantially from what you would pay or receive during regular market hours.
One way to protect gains and limit losses automatically is by placing a trailing stop order. With a trailing stop order, you set a stop price as either a spread in points or a percentage of current market value. In practical terms, here is what happens: One thing to consider: If you're planning on holding a particular investment for an extended period of time because you believe its long-term potential is substantial or that it is undervalued , placing a trailing stop order may not be a sensible course of action.
As an asset class, stocks are notorious for their collective and individual volatility; the road is certainly bumpy. Yet, you may not be able to profit from your convictions because your trailing stop orders could be triggered as a result of ordinary volatility. If you have any doubts or questions, consult your financial adviser. Bracketed orders go one step further than trailing stop orders. In addition, however, you can establish an upper limit that, when reached, will result in the stock being sold.
You've reached the end of the stock trading tutorial. You now have the basic building blocks to help you make better decisions for your portfolio.
This handy summary will serve as a cheat sheet in the future:. Updated October 27,More...