Stock Trading - How to Invest in Stocks

In this article, we shall add to the glossary of stock trading basics by explaining what are stock market orders.

Stock market orders: As more and more investors start to trade online to take advantage of the reduced transaction costs and the convenience, it is important for them to be totally conversant with the methodology of placing buy and sell orders with their brokers. You can, in fact, use a variety of buy and sell orders so that you can take more control over the transaction and not be entirely at the mercy of the broker. Some types of orders exercise control over the transaction by price while others control it by time.

Here is a rundown on the various types of orders that you can use with your broker.

Market order: this is the quickest and the simplest method of placing an order and getting it fulfilled. In a market order, you instruct the broker to buy or sell at the prevailing price at the moment of execution. If you are following the market, do not expect to get the exact price that used the on-screen but you can expect a price that is fairly close unless your stock is hugely volatile. Remember that there is no guarantee of any price and you will simply had to trust the broker to do his best. This is also the cheapest type of order in terms of transaction cost.

Limit order: the limit order is an order in which you instruct the broker to buy or to sell at a specific price. If your price is not available, the transaction will not go through. You therefore have control over the price at which you will enter or exit a position. Remember to check with your broker what he charges to execute limit orders. If the charge is higher than you would like, and your stock is not particularly volatile, you may be better off placing a market order.

Stop loss order: stop losses are standard risk management practices that prevent you from taking large losses on open-ended positions. You predetermine what losses you can live with on a particular stock and, if that price is reached, you sell straightaway and crystallise your losses. Remember that you will lose some of the time at least and the trading discipline enforced by a stoploss means that you can limit your losses to what you are comfortable with. You will normally place a stoploss order by giving the broker a price trigger that would be below the prevailing market price. The moment the stock drops to your stoploss price, your order becomes a market order which the broker will execute instantly.

Trailing stop order: this operates in a similar fashion to a stoploss order except that it is used to protect a profit rather than contain a loss. If your stock is already in profitable territory, you set a take profit price to protect you against a sudden drop in the price. If your take profit price is reached the order immediately becomes a market order and your broker will sell without reference to you.

Good till cancelled order: this means that the order continues to to be in effect until you cancel. This is used in conjunction with other orders to control the timing.

Day order: a day order is an order that is valid only for that particular trading day. If the order cannot be executed, you will need to place a fresh order on the following day.

All or none order: this means that the entire order has to be filled and a partial execution is not acceptable. This is useful particularly in the case of thinly traded stocks.

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