With the ever-increasing capabilities and influence of digital technology and internet, many investors are choosing to buy and sell stocks by themselves rather than hiring an advisor to execute the trades. But before you start doing that, it is important to know how orders work and when they are necessary.
Here are the most basic stock order types that will help you boost your investing experience as a beginner.
Market orders are one of the two most important order types in trading. It is also the most basic type.
A market order is an order to buy or sell right away at the current price. Usually, if you want to buy a stock, then you will pay at the ask price or near it. Conversely, if you want to sell a stock, you will receive a price at the bid price or near it.
You have to remember, though, that the last traded price is not always the price at which the market order will be fulfilled.
The market is fast-moving and volatile, so the price you expect may not be the price you’ll get when you place that market order.
Market orders are particularly common among individual investors who want to buy or sell stock instantaneously.
The benefit of using this order is that it is guaranteed that the trade will be filled, executed as soon as possible.
A limit order is also sometimes called a pending order, and it lets investors buy and sell securities at a certain price in the future.
Limit orders execute trade once the price reaches a specific level, and the order will not be filled until the level has been reached.
In other words, the limit order sets the minimum and maximum price at which the trader is willing to buy or sell.
There are generally four types of limit orders, namely:
- Buy limit: this is an order to buy a security at or below a specified price. Limit orders must be placed on the correct side of the market to hit the goal of improving price. For a buy limit, the trader needs to place the order at or below the current bid.
- Sell limit: this is an order to sell an asset at or above a predetermined price. To guarantee better prices, the order should be placed at or above the current market ask price.
- Buy stop: this is an order to buy a security at a price higher than the current market bid. A stop order to buy only executed the trade when a predetermined price level has been hit, and that it usually referred to as the stop level. Traders place buy stop orders above the market price, while they place sell stop orders below market price. Once the stop level has been reached, the order will be converted into a market or limit order.
- Sell stop: this is an order to sell an asset at a price lower than the current market ask. Similar to the buy stop, a stop order to sell executes only after a specified price level has been reached.