Understanding Stock Order Types To Power Up Profits

Individuals who don’t manage their own money often seem to think you either “buy” or “sell” a stock—and that’s that. But savvy investors know that the mechanics of those transactions can determine a trade’s success just as surely as more dramatic factors.

The Basics: Market Orders

Keep in mind that, while we often talk about a singular “stock price,” these numbers are instantaneous representations of dynamic market movement. At any given moment, each stock has both an “ask” price (the price asked by owners of the stock offering it for sale, or “floating” the stock) and a “bid price” (the price point at which prospective purchasers are seeking to acquire the stock).

When you buy or sell a stock, the first question is “at what price?”

A market order guarantees a trade’s immediate execution, as you’re essentially offering to buy the stock near the current ask price. This means you’re paying a premium relative to the current bid price (how much of a premium depends on the bid-ask spread of the stock) but ensures that you acquire the stock in question.

Another issue here is volatility: stocks have prices that are nearly always in flux (especially during normal trading hours, but even after hours). This fact means that the price may change between the time you opt to make a market order and the time the transaction is completed. Liquidity plays a huge role in how fast trades can be executed; the most popular stocks have 1000’s of people trading them at any given time, and a seller/buyer can be located near instantaneously (and thus closer to the current ask price). Meanwhile, finding a reliable price point for penny-stocks can be a major issue. 

A Step Further: Trading with an Eye to the Future (and Risk)

The principal alternative is called a “limit order.” With this option, a trader gains price certainty but loses the assurance the trade will be executed. A limit order essentially allows you to set a maximum or minimum price point for making a stock transaction. If the market moves past your imposed limit on the order before it’s complete, you won’t buy or sell a thing. Limit orders typically carry a somewhat larger commission than market orders. They’re commonly used to lock in upside when buying a stock, with a sell order set at a target profit level.

These two order types define the vast majority of transactions that involve buying or selling a stock at the current moment in time or at a pre-determined price point. Other order types allow traders to up their game by quickly conducting a transaction in response to inter-connected future events or within a specific window of time.

First, stop-loss orders are one of the most powerful tools available to traders for managing downside risk. This order-type sets a price “floor” for a stock in your portfolio: if the stock price falls below this point, you’ll automatically enter a market sell order (this means, if a stock is falling fast, you may still receive slightly less than the amount for which you set the stop loss). Some traders keep a stop loss order on every stock they own to limit dramatic downside risk, especially smaller traders who can’t keep an eye on markets every minute of the day.

Second, Good ‘Til Canceled orders (GTC) provide an avenue for purchasing a stock during a limited window of time. For instance, imagine you identify a stock that you’d like to purchase if it dips below $10, but only for the next week. You could set a GTC order with a 5-day expiration time. This order would mean that if the transaction hasn’t been conducted by the end of that period, it will be canceled. GTC orders generally default to one-day expiration times.

Finally, these order types can be grouped using OCO (Order Cancels Order) and OSO (Order Sends Order) operations. These mechanisms are typically used to set up a series of logically connected orders. For instance, you could issue an order to buy a stock if it dips below $10, sell and short if it falls further to $8, and takes profits at an upper limit of $15. 

To arrive at a well-informed estimate of where to set upside and downside targets, there’s no substitute for good data tied to a strong analytical approach. To learn how NQ users use our real-time stock analytics platform to consistently target profitable stock plays, we recommend one of our totally free virtual training seminars. You can sign up for a spot in our next session using the button below.

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