Brokers offer online trading platforms to traders for buying and selling shares, and traders can place different types of orders to trade stocks on their platforms. Order types give traders more control over their trading and give them many options to set different conditions and parameters for buying and selling stocks.
In the following section, we list and explain the common types of orders, which you can use to buy and sell stocks at the best possible prices.
Table of Contents:
MARKET ORDER
A market order allows you to buy or sell a security or security at the best available market price. For example, if you want to buy Apple stock (AAPL) at its current market price of $174 per share, you can do so by placing a market order.
Similarly, if you want to sell the stock at the current market price, you need to place a market sell order.
Market order is a quick way to buy or sell stocks or securities since your order would be satisfied at the current market price rather than the price above or below it.
LIMIT ORDER
A limit order allows you to buy or sell a security or security at the specified price, which can be higher or lower than the market price. A limit order has four types: buy limit order, sell limit order, buy stop order, and sell stop order.
Buy limit order
A buy limit order allows you to buy a security below the market price. For example, if Facebook’s market price is $20 but you think the price is too high and you want to buy it for $15 instead, you can place a buy limit order for $15.
Your order will remain pending until the market price falls to the specified price of $15 per share. If the price does not decrease to the specified price, the order will not be executed.
Sales limit order
A sell limit order allows you to sell a security above the market price. If you want to sell a stock at a price above the market price, you need to place a sell limit order.
For example, if the market price of a stock is $20 but you want to sell it for $25, you can place a sell limit order and enter $25 as the desired price. The order will be executed when the market price rises to the specified price. But if the price does not rise to the specified price, the order will remain unpublished.
Buy stop order
The buy stop order is a limit order that allows traders to buy or sell a security after the price has reached a specified level.
For example, if you
want to buy a stock if it breaks its price range of $9 and $10, you can place a stop order and specify a price of a few cents above $10. The order would be triggered as soon as the market price reaches the strike price, turning the order into a limit or market order, which would satisfy your order at the specified market price or price.
Buy stop orders can also be used to hedge your short position. For example, if you opened a short position in a stock, you would incur losses if the stock price rises.
To hedge your downside risk, you can open a buy-stop order and set the strike price above your entry price. If the price rises and reaches the specified strike price, the order would turn into a limit or market order, which would close your position and limit your losses on your short position.
Sell stop order
The sell stop order,
such as a buy stop order, is triggered when the price reaches a certain level specified by you. It can be used to hedge downside risk on a long position and to execute a short-term selling strategy.
For example, if you bought a stock for $20 per share, you would want to hedge your downside risk by placing a sell stop order with a strike or trigger price of $18 or any other level below the current market price.
If the price
drops and reaches $18 or less, the order would be turned into a limit or market order and fulfilled at the best available price.
STOP-LOSS ORDER
Stop-loss orders, as the name suggests, protect you from losses if a trade goes against you. The order works for both long and short positions and will close your positions once the price reaches your target level.
A stop-loss order
remains dormant but turns into a market order as soon as the price reaches your strike or stop-loss point. In contrast, buy and sell stop orders remain active from the beginning and turn into a market or limit order when the price reaches the specified point.
TAKE PROFIT ORDER
Unlike a stop-loss order that limits your losses, the take-profit order protects your gains from erosion and helps you lock in some of your profits from a position.
For example, if you bought a stock for $50 and the price rises to $60, your gain from the position is $10 per share. However, if you fear that prices may withdraw, you can place a take profit order and set a take-profit point below $60, the current market price, to lock in your earnings. If the price falls below $60 and reaches your profit point, the order would be triggered and your position would be closed.
