Opening a trade – Buy
Now that you understand the stock market let’s take a look at the terminology; you need to understand to be able to make a stock trade.
Opening a market order on a stock means you wish to buy that stock at the current market “Ask” price. This is the quickest executing type of order, as it means you will accept the Ask price closest to the current market price. The price you get may differ from the displayed price on the exchange when you place the order because of factors related to volatility and liquidity.
A limit order indicates the highest price you are willing to pay or the lowest price you are willing to accept to sell a security. This helps to protect you from sudden swings in prices that you may suffer while executing a market order. Still, it may also take longer to execute as the trade will only be executed when the market order conditions are hit.
Example: Limit order to buy.
Joe wants to buy Apple Inc for $600 per share. The current price is $601. He places a limit order for 100 shares of Apple for $600. If Apple’s price suddenly moves sharply down to $595, his trade may execute at $595. However, if the stock price never moves down and continues to rise to $610, his order will never be executed.
Closing a trade – Stop Losses
There are also many ways to sell stock; here, we look at those types of trade.
The simplest way to sell your stock is to place a market order to sell it. This is the quickest executed type of trade. Of course, if the stock price moves very quickly between the time you click the sell button and when the trade is executed, then you may not receive what you expect for selling the stock.
Limit Order Sell
To protect your sale of stock, you may want to execute a limit order for sale.
Example: Limit order to sell.
In this example, Joe wants to sell Apple Inc. at $610 per share; he places a sell limit order. The stock price moves from $601 to $611, his sell limit order will execute at or above $610.
However, if the stock only moves down from $601 to $590, his sell order will never execute.
Stop Market Order
A stop market order is similar to the previous example except that when the order price is hit, it executes at the current market price. Essentially, it means you wish that your stop order becomes a market order once the target price is hit.
Example: Stop market order to sell.
Bobby places a stop market order for Exxon Mobil at $85. The stock price hits $85, and the trade is activated. The market is volatile, and instantly the stock moves to $84.50 before the trade is executed because the order has become a market order after activation. Bobby gets only $84.50 per stock.
Stop Limit Order
Using a stop-limit order means you want your order to be executed at a specific price and guarantee that when that activation price is met, the execution of the order is also at or better than the target price.
Example: Stop limit order to sell.
Susie wants to sell IBM at $200 per share, and the current stock price is $199. She opens a limit order with an activation price of $200 and a limit price for the order at $200. IBM’s stock price moves for a split second to $200 but quickly slips back to $199.90. The trade is now activated, but not executed. Thirty minutes later, the stock price moves back up to $200.50. The activated trade now executes, and the sale is made.
This type of order gives you maximum security that you will get the price you wish for your sale.
A trailing stop is a very different kind of market order best described in an example
Example: Trailing Stop Sell
Take a look at the following chart and read the example text below.
Bernard owns a $10 stock and places a 10% trailing stop. This means the stop is initially set at $9, 10% under the stock price.
- Day 1 through 4, the stock increases in value.
- The trailing stop remains 10% behind the stock price.
- On day five, the stock falls, but the trailing stop does not. It remains at 10% behind the previous high since initiation.
- Day 6, the stock continues higher.
- Day 8 through 10, the stock starts to fall, but the trailing stop does not.
- On day ten, the stock price falls through the value of the trailing stop, and the sell order is executed.
The trailing stop can be a very flexible and useful way of taking care of your risk while you are away whilst also trying to seek some extra gain.
A bracket order or conditional order is simply a way for a trader to place a multiple leg order with a broker.
This means you can combine any of the previous market orders into a rule which executes the logic.
For example, Billy Jean wants to buy Suntech Corp at $5; she also wants to ensure that if it falls to $4.50, she sells it. She also thinks a 20% gain on the stock is a good profit and would like to automatically sell it at that price ($6).
The stock price is currently at $4.80.
Billy Jean is going on holiday, so she decides to open a bracket order to handle the trading for her.
In one trade entry, she opens three orders.
- A market order at $5
- A conditional stop market order at $4.50
- A conditional stop-limit order at $6
This means that Billy Jean’s stock will be purchased at market price when the stock hits $5 (1).
If the stock goes to $4.50, the stock will be sold at market price (2) and (3) will be canceled.
If the stock goes to $6, the stock is sold at or above $6 (3), and (2) will be canceled.
Bracket orders are a very flexible way to establish rules upfront and ensure you stick to them.
This section reviewed a quick start checklist to help you organize the things you need to start investing in the stock market.
We then looked at the practical side of stocks, such as stock prices, stock splits, stop losses, and market order types.