An Introduction To’ Orders’ In Stock Trading

Stock trading is all about placing orders. You place orders for executing your trade-- buying, selling-- funding your account or withdrawing your earnings. These are very simple orders. There are, however, more important orders, which are of technical nature and must be understood and intelligently used by serious investors to derive maximum benefit from various trading situations.

1. Market Order

The simplest and the most common of these orders is the Market order. A market order is used to simply inform your broker that you are willing to accept whatever price of the stock is prevailing in the market at the time you place your order, whether it is for buying or selling your shares.

A market order is very easy to execute, as there are no stop loss type considerations involved. The computer of your broker is not obliged to track the rise or fall in the market price of your share before it buys or sells it for you. Such orders usually attract lower commissions since they are easy to execute and are free from any hassles.

For example supposed you wished to buy google’s shares. As on 13 th March, 2008, the price of a google’s share was $443.01 during the trading time. You would log on to the trade page of your brokerage account and click on GOOG, the trading or the ticker symbol for google. You would place a buy order for, say, 100 shares of google. You would then be asked about the type of order you wanted to place. If you placed market order, it would be executed at the price per share prevailing in the market at that moment, although by the time the order is actually executed a few seconds later, the market price may become higher or lower. As a buyer, you would be a gainer if the price of your share rose a few seconds after you placed your order and a loser if the price fell.

2. Limit Order

As the name suggests, a limit order allows you to place a limit on your trading order. You can put a limit on the maximum price you are willing to pay per share if you are buying a stock. Alternately, you put a limit on the minimum price per share that you are willing to accept if you are selling your stock.

The basic difference between the market order and the limit order is that your broker cannot guarantee that your limit order will be executed as the change in prices of stocks depends upon numerous market forces, which no body can control. A limit order can be illustrated by an example:

Let us suppose you want to buy 200 shares of a certain stock. The current market price is, say, $30 while you do not want to pay more than $27. So you place a limit order, which directs your broker to execute your buy order only at $27 per share or less. If the price of your stock falls to your prescribed limit, your order will be executed.

There are four factors that should guide you before you place a limit order.

• You must understand that the stock price may or may not rise or fall to the limit you have prescribed. Consequently your limit order may and may not be executed.

• Your limit order is executed by your broker in the order it is received.

• It is likely that the price of stock you are interested in buying or selling will reach the limit set by you, still your trade will not be filled because the price may have fluctuated to higher or lower level of your limit before your broker could get to your order.

• If there is a sudden drop in the share price, your order will be executed at your price limit. Let us imagine a situation when the stock you want to buy is trading at $50. You place a limit order at $48 per share. But suddenly some thing serious happens in the market and the price of your stock steeply plummets to $40. As the price of your share starts falling, your buy order is executed at $48. Immediately thereafter the price falls to $40 putting you at a loss of $8 per share.

This is how the stock order placements work.

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