There are three main types of order, Market Orders, Limit Orders, Stock Market Orders, Stop Limit Orders, investors need to know about.
If you want to keep things simple, you can stick to placing market orders.
What are Market Orders?
Market orders guarantee your order will get filled at the best price. It might not be filled at the price you want, but it will get filled. So let’s say you want to buy 100 shares in Twitter (TWTR). You’re investing for the long term, so a slight difference in price isn’t really a concern for you. You should place a market order and your broker will fill it at the best price the shares are available for.
If you want to exert a little more control over the process, here are the other things you can do, using Twitter stock as an example:
What are Limit Orders?
Limit orders let you buy or sell at a predetermined price. Here’s an example of limit orders in action.
Buy 100 TWTR, Limit = $25. $25 is the maximum you are prepared to pay for one share Sell 100 TWTR, Limit = $25. $25 is the minimum you are prepared to accept for one share
Let’s say you want to buy 100 Twitter shares, but think it’s overvalued at the moment. You can set a limit order to buy the shares when they reach a lower price. Now, you might be wrong and the shares never reach that low – which means the order will never be filled.
What are Stop Market Orders?
Stop market orders let you sell as a market order once a predetermined price has been reached. It essentially sets a trigger to release your shares to the market.
Stop Market 100 TWTR at $25. Once your TWTR shares hit $25 they are put on the market for sale.
You may get more or less than $25, depending on which way the market is moving. But $25 is the “trigger” that activates a sale.
What are Stop Limit Orders?
Stop limit orders are the same as a Stop Market except you also set a price below which you will not sell.
Stop Limit 100 TWTR at $25, Limit = $23 – When your TWTR shares hit $25 they are put on the market for sale, but you will not accept anything less than $23 per share.
When would I use these order types?
Let’s say you take a month-long, off-the-grid trip to the Himalayas and can’t watch your stocks during that time. You might think about entering a stop market order before you leave. This would protect you from a major loss in case the market were to crash while you’re away.
Beware that as your orders get fancier, your broker’s commissions may go higher. Double check before you execute a stop or limit order that it’s worth it. Even with all these options (and more) available to you, when buying and holding great companies over the long-term, simple market orders are usually the best way to go.
Let’s recap:
- A market order means buying and selling at the best available price.
- A limit order means buying and selling at a predetermined price.
- Stops and limits can be used to protect investors from market crashes.
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