Different Types of Market Orders
Any type of stock market trader, whether novice or professional, will need to understand the various mechanisms for managing their orders and positions in different stocks. These are commonly referred to as stock market orders. Among these useful tools for managing such positions and trades are market orders, limit orders, and stop orders.
Without a doubt, market orders are the most easily understood types of stock trading order concepts. Any individual who wishes to buy or sell shares of a certain stock needs to execute the order. When the person puts in a market order, he or she is instructing the broker to buy or sell a given number of shares of the underlying stock at the very next possible time. The upside to this type of order is that it is typically executed very quickly, in some cases and for some shares immediately. For most any well traded stock issue, the order speed will be in seconds at the most. The downside to such an order is that the customer is not guaranteed any given price at which to buy or sell the shares. In general, unless the market for that particular underlying company's stock is moving quickly due to unusual circumstances, the individual's market order will be filled close to the price that was displaying on the live price updates for the stock itself. One thing that a stock trading novice should keep in mind is that market orders can be dangerous, if they are set up after the stock market has closed or before it has opened. This is primarily because no one knows precisely at what price the market for that particular stock will open at, on the next day or trading session.
Limit orders are more commonly and safely used to purchase and sell stocks. These types of orders guarantee a particular price or better for any trade, whether buying or selling a stock. The advantage to this type of order is fairly intuitive. The customer will know that he or she is getting the price for the stock which was directly specified. If the stock can not be purchased or sold for that exact price or better, the order will simply remain resting until the price conditions are fulfilled, or the order is canceled by the customer, or allowed to expire. This is also the disadvantage to the order. It is very possible that the customer's price limit will never be met. He or she may miss out on the opportunity to acquire or dispose of the shares in question, particularly if the market moves rapidly away from their price target and does not return to it. As an example, if IBM shares are trading at $101 per share, and the customer places an order to buy 100 shares at a limit of $100 per share, then the individual will only acquire the shares if the price drops down to $100 per share or better. Limit buy orders are always placed below the current stock market price for a given security, while limit sell orders are always placed above the present price for a stock.
Stop orders are the third type of stock market order. These types of orders are commonly used for a person to cut his or her losses on a stock, which is why they are often referred to as stop-loss orders. Alternatively, they could be used to lock in a minimum profit on a stock that they own, which would make them stop-profit orders. Either designation of stop order works exactly the same. The customer is setting up a stop price at which to purchase or sell shares. They work the opposite way of the limit orders outlined above. This means that a buy order using a stop limit would be placed above the current price of the stock, so that if the price of the stock rises to that order level, then the order would turn into a market order to immediately buy at the then current price. Similarly, a sell order employing a stop limit would be put in below the presently trading price of the stock. If the price of the stock declined to that level, then the order would become a market order to instantly sell at the then current price. The positive element to this type of order is that it allows the user to limit his or her losses by selling a stock before it declines too steeply, or to lock in similar existing profits before they decline too far. The negative element to this kind of order, which is often forgotten or misunderstood even by experienced stock market traders, is that since the stop order will become a market order once it is triggered, the customer is not in fact guaranteed to receive the price that they want when the stock is actually bought or sold. In a perfect world, the market order will immediately execute once the stop level is reached. In reality though, fast moving markets in a given security can cause the person concerned to take a greater loss, or to realize a smaller profit, on the sale of the security involved.