hort positionThe stock market can be a place where various kinds of orders are executed in one day. If you wish to perform an essential part in the day to day trading, then you would be wise to become familiar with the particular different types of orders. The most efficient individual to explain them can be your agent. You can also find out about them in books, different articles and even follow online tutorials.
Stock trading for beginners is best explained by starting with the basics. One of the elementary topics that an aspiring stock trader needs to grasp is the technical know-how of the different trading orders they can place with a broker while trading stocks.
A trade order is, essentially, an instruction to a broker to buy or sell stocks. A simple trade order, also known as a market order, involves the execution of the trade on an immediate basis at the available market price at the time of execution. But such an order is fraught with the possibility of slippage and financial risk.
Slippage refers to the difference between the price a trader expects to buy or sell stocks at and the actual price at which a market order may be filled.
A trade that is executed without any specific instructions or restrictions is vulnerable to the volatility of the stock market and could flip a winning trade into a losing trade.
Different types of orders
Modern trading platforms offer traders an array of advanced order types that they can use to bolster their trading strategies.
A market order is the most basic type of order as discussed above. It is executed immediately at the available market price. A market order to buy stocks will be executed at the current ‘ask price’ or the price that the stocks are being sold for in the stock market. A market order for selling stocks will be executed at the current ‘bid price’ or the price that the stock market is offering to buy a particular stock.
The key thing to remember here is that even though a market order is executed immediately, there’s no guarantee that the order will be executed at the ‘ask’ or ‘bid’ price that was prevalent in the stock market at the time of placing the order. The time difference between order placement and order execution, no matter how slight, could result in the order being filled at a price different from what was expected.
Stocks that trade over tens of thousands of shares a day usually does not display large difference from the ask or bid price but in fast-moving or a thinly traded market, there may be a substantial difference between the expected price and the price at which a market order is executed. This could incur losses to the trader. Thus, a market order is sure to be executed but doesn’t guarantee price.
A limit order is used to guarantee that the order is filled at a desired or better price. When you place a limit order to buy stocks, you should do it at the current ask price or lower. This will ensure that when the market price reaches your desired value or lower, the order will be executed.
While placing a limit order to sell, the trader would be wise to set the price limit at the current bid price or higher. This helps the order be executed at the desired selling price or a better, higher price.
Limit orders offer precision in the execution of trades. You must be on the right side of the market when you place a limit order; placing it at or below the market ‘ask’ price when buying and at or above the market ‘bid’ price when selling.
A stop order or a stop-loss order does away with the need to constantly monitor stock market activity. It can help lock in profits or minimize losses by triggering a market order or a limit order at a pre-set price above or below the current market price.A stop-loss order is set in the opposite way of how a limit order is set. A stop ‘buy’ order is set above the current market price and a stop ‘sell’ order is set below the current market price.
This order is not placed for traders who desire an immediate execution of their orders. Instead, it helps safeguard losses for traders in a long or short position.A ‘long position’ trader is a trader who buys stocks hoping for the stock price to appreciate. Such a trader may set a stop-loss order below the current market price to minimize losses in case the price drops instead of increasing.
A ‘short position’ trader is a trader who sells borrowed stocks hoping for prices to fall to buy the stocks back at a lower price and make a profit. Such a trader would set a stop-loss order above the current market price to minimize losses in case the stock price increases instead of falling.
Knowing the various order types is essential to trading stocks successfully. A stop-loss order is the most commonly used order type as it helps minimize losses and adjusted profits no matter what activity the stock market exhibits.