Stocks Trading Order: What's the deal?

Stocks may seem easy to some people, but trading orders can be confusing to new investors. In other words, what is a trading order? And, how to place an order for stock trading?

Basically, to put things simply, swaps are agreTrading orders are instructions given by investors to their brokers to execute a trade in the stock market. The orders can be placed either during or after market hours, and they allow you to buy or sell stocks at a specified price or at the market price.ements between two parties to exchange cash flows based on the performance of an underlying asset. In the case of stock swaps, two parties agree to make a trade on the returns of a specific stock.

Here are the different types of trading orders you can use for stock trading.

1. Market Order

When a market order is placed, a stock will be purchased or sold immediately at the best available market price.

This type of order being executed is usually used when things move quickly and you don’t want to miss out on the opportunity.

2. Limit Order

An instruction to buy or sell stock at a specific price or better. Executing a limit order means that the order will only be executed if the stock price reaches the specified limit price.

A buy limit order is placed below the current market price, while a sell limit order is placed above the current market price.

An explanation of how limit orders work in the stock market.

In order to understand what each order type entails, let’s take the example of Starbucks.

Let’s say you own 100 shares of Starbucks, which is currently trading at $100 per share, and you want to sell your shares at a higher price. You could place a limit order to sell your shares at $110 per share, which is 10% higher than the current market price.

Once you place the limit order with your broker, the order is sent to the stock exchange and added to the order book. The order book is a list of all the buy and sell orders for a particular stock, sorted by price and time.

If a buyer is willing to pay $110 per share or more for the stock, your sell limit order will be executed, and your shares will be sold at the limit price of $110 per share. However, if there are no buyers willing to pay $110 per share or more, your order will remain in the order book until a buyer comes along and meets your limit price.

It’s important to note that a limit order does not guarantee execution, as the market price may never reach the limit price specified in the order. Additionally, if the market price drops below your limit price, your order will not be executed, and you may miss out on potential profits.

A limit order can be useful for investors who want to sell at a higher price or buy at a lower price, but it does not guarantee execution at the specified price.

Read more tips and tricks in stock investing:

3. Stop Order

A stop order is an instruction to buy or sell a stock once it reaches a specific price, known as the stop price. In this type of order, losses are limited or profits are protected in order to protect the investor’s interests. The buy-stop order is placed above the current market price of the security, while the sell-stop order is placed below the current market price of the security. A stop order is a type of trading order that enables you to specify a price point at which you want to sell your shares so that you can limit the potential losses you may incur as a result of a wrong move.

Let’s take the same example as the previous trading order. Consider the example of you owning 100 shares of Starbucks, which are currently trading at $100 per share, and you are concerned about the stock’s value dropping in the future, so you want to minimize your potential losses if that occurs. In the event that the price of the stock falls below a particular price point, known as the stop price, you can place a stop order to sell your shares.

As the situation stands, you decide to place a stop order at a price of 10% against the price of the stock or when it reaches $90 a share. As soon as the stock falls below $90 per share or below, your stop order will be triggered, and your shares will be sold at the market price.

When you place a stop order with your broker, you are sending the order to the stock exchange where it will be added to the order book. If the stock price drops to or below your stop price of $90 per share, the stop order will be triggered. This will become a market order to sell your shares.

The market order will then be executed at the best available market price, which may be lower than your stop price. There is a possibility that you will sell your shares for less than you originally intended, but the stop order will ensure that your losses will be limited.

4. Stop-Limit Order

A stop-limit order is a combination of a stop order and a limit order. As the name suggests, this type of order is used to buy or sell a stock once it reaches a specific price, but the order will only be executed if the price stays within a specified limit range. The buy stop-limit order is placed above the current market price with a minimum price below it, while the sell stop-limit order is placed below the current market price with a maximum price above it.

Generally, a Stop-Limit order is a kind of stock trading order where you are able to set a maximum price at which you are willing to buy or sell a stock based on the price point at which the order was placed.

As an example of how a Stop-Limit order works, for instance, let us assume that you own 100 shares of Starbucks stock, which are currently trading at a price of $100 each. You want to protect your gains, but you don’t want to sell your shares until the stock reaches $110 per share. So you place a Stop-Limit order to sell your shares if the price is set to $110 per share, but only if it can be sold for a price of $108 per share or higher. In this scenario, your stop price is $110, and your limit price is $108. Once the stock price reaches $110, your Stop-Limit order becomes a limit order, meaning it will only execute if it can be sold for $108 per share or higher.

If the stock price drops below $108, your Stop-Limit order will not be executed, and you will continue to hold your shares. However, if the stock price reaches $110 and then drops to $108 or below without bouncing back, your order will be executed, and you will sell your shares for $108 per share or higher, depending on the market conditions at the time.

5. Trailing Stop Order

The general idea behind trailing stop orders is that a trader sets a stop loss at a certain percentage or dollar amount away from the market price, and allows that stop loss to move with the market.

Essentially, a trailing stop order is designed to help traders limit losses and lock in profits as the market price moves in their favor by altering the stop loss level. This type of order is commonly used in trading and investing, especially in volatile markets where prices can change rapidly and unexpectedly.

Here’s how a trailing stop order works: Let’s say you buy Starbucks stock at $100 and set a trailing stop order with a 10% trailing stop. This means that if the stock price drops 10% from its highest point after you bought it, your stop-loss order will trigger and the stock will be sold automatically.

However, if the stock price rises to $120, your trailing stop order will move up as well and will be triggered if the price falls 10% from the new highest point of $120. In this way, the stop loss level follows the market price, allowing you to lock in profits and limit potential losses.

Bottom Line

In order to meet your investment goals, there are many types of trading orders that can be implemented depending on market conditions, risk tolerance, and returns that should work in your favor.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.