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Proper Placement of Stock Orders
Types of orders and strategies for buying and selling securities
If you’ve ever placed an order on the stock exchange, you probably haven’t thought much about what type of order it was. Most investors are only familiar with a market order or a buy/sell order with a limit. In fact, there are other types of orders that can be used intelligently. Using the right types of orders can significantly improve investment success and avoid unnecessary losses. Below, we will explain the most common types of orders in more detail.
Market Order: Buying and Selling at Any Price?
The market order is by far the most commonly used type of order. These orders have the addendum “at best” for buying and “at market” for selling. Any order that is not accompanied by a limit automatically becomes a market order. However, placing “at best” or “at market” orders is not without risk, as essentially, you agree to accept any purchase or sale price determined at the time your order is placed with the broker or in the trading system. Market orders should only be used in highly liquid markets. For example, buying a S&P 500 stock on the NYSE is relatively safe. However, there is a risk of unfavorable execution for a small-cap stock with lower trading volume or in a smaller exchange.
Playing it Safe with a Limit Order
The safer option is the so-called limit order. In this case, you specify a certain limit when buying or selling. In contrast to a market order, you do not accept any price, but instead specify that the sale of a share should only take place if it reaches or exceeds the price of USD 20.00, for example. The same principle applies in reverse as a buy limit. This helps you avoid buying at a price that is too high.
Stop-Limit: Limiting Your Losses
An important tool for limiting losses is the stop-loss order, specifically the stop-market order. When the stop price is reached, a market order is triggered, ensuring the execution of your order. There is also the option of a stop-limit order. In this case, when the stop price is reached, a limit order is activated. The execution is not guaranteed, but a specific price level cannot be undercut or exceeded.
Trailing Stop Order: Automatically Securing Profits?
Short-term traders often use the so-called trailing stop order. This is a stop-loss order that follows a rising stock price and adjusts accordingly. You define a certain distance between the current stock price and the stop limit, either in percentage or absolute terms.
Our Conclusion:
In long-term stock investing, it’s advisable to use both limit orders and stop orders. Any reputable broker offers this option easily and free of charge. Other order types, such as trailing stop and “one-cancels-other,” are more relevant for short-term oriented investors.
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