A How-To guide to make the most of your trades
What's a limit order? What is "buy to cover"?
started in investing can be confusing. Here, we're
concerned with just placing order and executing
orders in equities - stocks. If you're at this website,
you've probably got a basic understanding of the
process. However, we've worked in the business for
many years and have seen many people place an order
and they had no idea how the trades are actually
executed - or how they get a certain price.
and foremost: If you are selling stocks, someone
out there has to buy it. I remember quite well one
customer who held stock options in their employer
and wanted to sell that stock for their tidy little
profit. They called and said they saw the price
of the stock in the paper (the closing price the
day before) at $48.00 and wanted to sell it there.
Well, the stock was trading at that time at about
$46.00 per share at that person did not understand
why he couldn't just have $48.00 like the newspaper
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you "execute" a trade; that is, a trade
you placed was completed, you are either buying
the stock from somebody who was selling it, or selling
it to someone who was buying it. This 'someone'
could be another individual investor or a broker
or a market maker. The point is that when you sell,
someone bought your shares. When you buy, someone
sold you their shares.
do you want to trade?
You've got a few options when
it comes to trading stocks. Buying and selling are
the obvious choices. But there are other ways to
trade, too: selling short and buying to cover.
Selling short can be done
when you have a margin account with your broker.
Essentially, you borrow shares of a particular stock
and sell them, hoping that the stock will depreciate
in value, leaving the difference between the selling
price and eventual repurchase price in your pocket.
Buying to cover is the term for that eventual repurchase;
it closes out a "short position" in a
But since we're talking about
your first trade here, it makes sense to
focus on buying stocks. Besides, selling short and
buying to cover are more advanced investing topics
that we'll cover in a later section.
There are 5 common ways to
place an order with most brokers.
1) Market Order
2) Limit Order
3) Stop Order
4) Stop-Limit Order
5) Trailing Stop-Limit Order
Market Order: A market
order is a request to purchase or sell a stock at
the current market price. Market orders are pretty
much the standard stock purchase order. One thing
to keep in mind with a market order is the fact
that you don't control how much you pay for
your stock purchase or sale; the market does. You
WILL get your trade executed, but at whatever price
the market will have at that time.
Limit Order: This is
an order that executes at a specific price that
you set (or better) and can be open for a
specific time period. While a limit order will prevent
you from buying or selling your stock at a price
that you don't want, if the price is way off base,
the order will never execute. It's important to
note that some brokers charge more for limit orders.
Stop Order: This is
a market order that is triggered once your stock
reaches a specific target price, the stop price.
Stop orders may also be called stop-loss orders,
because they help investors put constraints on their
losses. In many cases, investors will have purchased
a stock at $30, and it is now at $50. They will
then place a Stop Order at $45. The trade will not
go through - ever - unless that stock drops to $45.
Then, and only then, it will be executed as a market
order. Basically, this order places a "floor"
on your stock price and can protect profits.
Stop-Limit Order :
This is identical to the stop order, except for
the fact that a limit order is triggered once your
stock reaches a specific target price. For instance,
you can place a stop-limit order that will trigger
just like a stop-order, but will not execute unless
you can get a certain price that you set.
Trailing Stop: Basically,
this is a stop order based on a percentage change
in the market price. The "trailing" means
exactly that. The "stop-price" trails
along behind the stock. For instance, let's say
you hold a $100 stocks with a 10% trailing stop.
At $100, the stock would be sold if it drops to
$90. However, let's say that the stock runs up to
$150. Now, the stock will be sold if it drops to
$135 (10% below that highest price). We love, and
recommend these types of orders as it not only protects
profits, but allows the stop price to move higher
if the stock does.
Duration of the order is important!
You will have to check with
your broker to see exactly what they offer. However,
most brokers always offer either a Day Order or
a GT (Good 'Till) order. A day order is good for
that day, and that day only. If the order is not
executed before the end of the day, you will have
to enter it again for the next day. A GT30 order
is a "Good 'Till 30 Days" order. When
you place that order, it will be good and in the
system for up to 30 days, unless cancelled. After
30 days, if not executed, it is cancelled. Some
will offer a GT orders "'Till" a specific
date. Perhaps you want an order Good 'Till Friday.
Most brokers will accommodate that.
do not mention the duration to your broker, it will
be treated as a day only order.
will need to specify the total number of stocks
that you want to buy or sell. Stocks are usually
traded in "round lots" (multiple of 100
stocks, for example).
With a few exceptions,
a round lot represents:
100 stocks if the stock price is $1.00 or
500 stocks if the price is $0.10 to $0.99
1,000 stocks if the price is lower than
An "odd lot" is acceptable on the trading
floor, but it is more difficult to trade, unless
it is an "at market" order with a significant
volume of the security. In many cases, you
will receive a slightly lower price for a sale because
of the uneven quantity.