|
You can use a variety of buy or sell orders to take
more control over the transaction than a simple market
order.
Some of the orders restrict the transaction by price,
while others constrain it by time.
Market Order
The market order is the simplest and quickest way to get
your order filled (or completed).A market order instructs your broker to buy or sell
the stock immediately at the prevailing price, whatever
that may be.
If you are following the market, you may or may not
get the last price listed. In a volatile market, you
will probably get a price close to that, but there is no
guarantee of any specific price.
Limit Orders
Limit orders instruct your broker to buy or sell a stock
at a particular price. The purchase or sale will not
happen unless you get your price.
Limit orders give you control over your entry or exit
point by fixing the price, which can be helpful.
Stop Loss Orders
A stop loss order gives your broker a price trigger that
protects you from a big drop in a stock.
You enter a stop loss order at a point below the
current market price. If the stock falls to this price
point, the stop loss order
becomes a market order (see above) and sells the stock. If
the stock stays level or rises, the stop loss order does
nothing.
Stop loss orders are cheap insurance that protects
you from a loss. Some important points to
remember: Be careful where you set your stop loss
points. If a stock normally fluctuates 3-5 points, you
don’t want to set your stop loss too close to that range
or it will sell the stock on a normal downswing. Stop
loss orders take the emotion out
of a sell decision by setting a floor on the
downside. If you plan to be out of touch from the
market, put stop loss orders in so you have some
protection against an unexpected disaster. Stop loss
orders don’t guarantee against
losses. When disaster strikes a stock, it may
fall so fast the best you can hope for is to come out
close to you price.
Trailing Stops
The trailing stop order is similar to the stop loss
order, but you use it to protect
a profit, as opposed to protect against a loss.
If you have a profit in a stock, you can use the
trailing stop order to follow it up. You enter the
trailing stop order as a percentage or specific dollar
amount of the market price. If the market price declines
by that percentage or dollar amount,
the trailing stop becomes a
market order and your broker sells the stock.
If the stock continues to rise, the trailing stop follows
it up since it is a percentage of the market
price. This protects your additional gains.
Good Till Canceled
A Good till canceled order instructs the broker to keep
the order active until you cancel it. Obviously, you use
this order with other order types to specify a time
frame for the order.
Some brokers have limits on how long they will hold a
GTC order... find out.
Bracketed Buy Order
A buy order that is accompanied by a sell limit order
above the buy order's
price and a sell stop order
below
the buy order's price. These three component orders will
all be set at a price determined by the investor at the
time the order is entered. This type of order allows
investors to lock in profits with an upside movement and
prevent a downside loss, without having to constantly
follow the position.
For example, suppose that an investor places a buy order
for 100 shares of ABC at $50, along with a sell limit
order at $55 and a sell stop order at $45. If the price
moves up to $55 or down to $45, the position will be
sold. The trader will either meet a specified gain of $5
with the sell limit or suffer a loss of $5 with the
stop-loss order. However, it is important to note that
having a stop-loss order at $45
doesn't mean that you are guaranteed that price. This
is because once triggered, the stop loss turns into a
market order and will be sold at the current market
price after triggering. If the stock gaps down to $40,
for example, your stop loss would be triggered and your
shares would be sold for around $40.
Bracketed Sell Order
A sell order on a short sale that is accompanied (or
"bracketed") by a buy stop order above the entry price
of the sell order and a buy limit order below
the entry price of the sell order. As the three
component orders are based on set prices, this type of
order protects the investor from the downside but also
potentially locks in a gain without the investor
constantly monitoring price.
For example, say an investor enters a short
position in ABC stock. To enter a bracketed sell order,
you enter the sell order at $30 - which is the entry
price - and add a buy stop order at $35 and a buy limit
order at $25. Depending on the price movement the
investor will either gain $5 or set his or her maximum
loss at $5.
Day Order
A day order is any order that is not a good till
canceled order. If your broker does not fill your order
that day, you will have to re-enter it the next day.
All or None
The all or none order states you want the entire order
filled or none of the order filled. You would use this
type of order for thinly traded stocks.
For more on order entry, see your broker's site and/or
visit
www.investopedia.com.
Use Stop-loss orders or risk
the market's wrath.
FREE
Today's "Trader
Thoughts" FREE
|
