There are a number of ways to do it. Make sure you know your options.
By William J. Lynott
You’ve decided to buy or sell a stock. That’s a simple transaction—much like going into a retail store, picking out a product, and saying, “I’ll take it.”
Well, no. Unfortunately it isn’t that simple.
There are many ways to buy or sell a stock—and not knowing about them could be costly for you. Here’s a brief rundown of the most common types of orders accepted by most brokers and what you should know about each of them.
The most commonly used buy or sell order is a market order. When you tell your broker to buy or sell “at the market,” you are not specifying a price. Your order will be executed immediately at the then current price.
Market orders are the easiest and quickest type of order to give. But there is a disadvantage. You won’t know the price until the transaction is completed.
These are similar to market orders—but don’t require the order be executed as soon as possible. A market-not-held order allows floor brokers to take more time and use discretion if they think they can get a better price by waiting to see where the market price is heading.
This type of order is always placed at the customer’s risk since it places decision making in the hands of a floor broker.
There are many ways to buyor sell a stock— and not knowing about them could be costly for you.
When you give a limit order to your broker, you specify the maximum price you’re willing to pay for a stock or the minimum price you’re willing to accept for a stock you want to sell. Once the price reaches the limit you have specified, the order will normally be filled at that price or better.
Setting limit orders can be tricky and may result in your order not being filled. For example, consider a company currently trading for $26 that you want if it trades down to your maximum price of $24. It could be costly if the stock trades down to $24.25 and then rises sharply, leaving your order unfilled.
Sophisticated investors use various techniques to help avoid that scenario. Some wait to put in their limit orders until the stock trades down close to the price they’re willing to pay before putting in their orders. Others will add a penny to their buy limits, say $25.01 instead of $25.00, or subtract a penny from their sell limits, thus getting ahead of the usual cluster around even amounts.
In any event, limit orders can sometimes produce some unexpected results.
When you use a stop order, you’re telling your broker to buy or sell a stock once it reaches the price you specify. Once it reaches that price, the order automatically becomes a market order and will be executed at the next available price.
Stop orders are often used to protect against a loss or to preserve a gain. For example, you might have a nice gain in a stock currently selling around $40. You could place a stop order to sell that stock if it drops to $32 (a drop of 20%). If the stock continues to rise in price, you’ll still participate in the gain. But then if it declines by 20%, it will be sold, protecting you against a further decline.
You need to remember stop orders become market orders once the stop price is reached. So, your order could be executed below your stop price in a rapidly declining market. Stop orders guarantee execution, not price.
Stop orders sound like limit orders, but there is a difference. Sell stop orders must be placed below the current market price and buy stop orders above the current price.
To protect against the disadvantage of limit orders described earlier, you may want to consider stop-limit orders. Unlike stop orders which automatically become market orders once the trigger price is reached, stop-limit orders restrict the orders to the price specified at the time the order is placed.
A buy stop-limit order becomes a limit order executable at the limit price or better when the stock trades at or above the stop price.
A sell stop-limit order becomes a limit order executable at the limit price or better once the stock trades at or below the stop price.
While stop-limit orders eliminate the possibility of getting a worse than expected price for your trade, your order could go unfilled if the market price is moving so quickly your broker can’t execute the order fast enough once the price passes your limit.
As the name suggests, day orders are good only for the day they are placed. If a day order can’t be filled for any reason, it is automatically canceled.
These so-called GTC orders normally stay in effect until they are executed by the broker or “until cancelled” by the customer. However, some brokers have their own policies for handling these types of orders. Some will automatically cancel the order if not executed in 30 or 60 days. If you use GTC orders, you should check with your broker to find out his or her policy.
A fill-or-kill order tells your broker you want to buy or sell only a specified quantity at a specified price (or better) right away. If the order can’t be executed for any reason, it is automatically canceled (killed).
Fill-or-kill orders are normally used by active stock traders (day traders) looking to profit from relatively small price moves on a daily basis.
With all these many types of orders to choose from, it’s easy to make mistakes. So know it’s always a good idea to call a customer service professional if you need a little help.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.
Bill Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach him at firstname.lastname@example.org or through his website: www.blynott.com.