By Aniket Bose. Edited by Arjun Chandrasekar.
Stock trade orders primarily refer to the different types of orders that can be fulfilled or placed on trading exchanges for financial assets, like stocks or even future contracts. In simpler terms, when a buyer has a buy price that matches the seller’s sell price, the result will be an executed trade of financial assets.
There are four main types of stock trade orders that we will focus on: Market, Limit, Stop-Loss, and Stop-Limit. Let’s go over each of these in-depth.
A market order is the most basic type of stock trade order. It is an order that allows investors and traders to immediately buy or sell their financial assets at the current market price. Usually, if an investor is going to buy a stock, they have to pay a price close to or exactly the set price by the seller. For a seller, when they are about to sell a stock, they will receive a price at or near the posted bid from the buyer. Market orders are typically popular among individual investors who want to buy or sell a stock without any delay. The main advantage of using market orders is that the investor is guaranteed to get their trade filled; it will also be executed as quickly as possible.
A limit order, or also known as a pending order, gives investors the freedom to buy and sell securities at a certain price in the future. This type of stock trade order is used by investors and traders to execute a trade if the price reaches a certain predetermined and agreed-upon price. The order will not be filled or executed if the price never reaches the pre-defined level. A limit order also sets the maximum or minimum price at which a buyer or seller is willing to either buy or sell financial assets. Let’s take an example: suppose you wanted to buy a stock at $15. You could enter a limit order for an amount that you want to buy this stock at. This means that you as an investor would not pay a single penny until the price of that stock has reached $15.. However, you may still have the opportunity to buy it for less than the $15 per share specified in the order, but you won’t be able to buy it for more than the $15 per share.
A stop-loss order is also referred to as a stopped market order, on-stop buy, andon-stop sell. Regardless of what you want to call this trade order, it is one of the most useful orders for traders. This type of stock trade order is different because, unlike the limit and market orders that are activated as soon as they are entered by an investor or trader, stop-loss orders remain dormant until a certain price is passed. After the time has passed, it is activated in the market as a market order. For instance, if a stop-loss order were to be placed on Tesla shares at $50 per share, the order would be inactive until the price of Tesla’s share either reaches or drops below $50. Once it reaches or drops below $50, the order would be transformed into a market order, and the shares would then be sold at the best available price in the market. Investors should consider using stop-loss orders if they don’t have the time to watch the market continually, but also need protection from a large downside price change. A good time for investors to use stop-loss orders is typically right before they leave for a vacation, or become swamped with work for their day job.
Stop-limit orders are very similar to stop-loss orders, but the difference between the two stock trade orders lies in their names. There is now a limit on the price at which a trade order will be executed at. Two prices are specified in a stop-limit order: the stop price, which will then convert the order placed by the investor to a sell order, then the sell order becomes a limit order that will only execute the trade at the limit price established.. This can mitigate a potential problem with stop-limit orders, which can be caused during a “flash crash” when prices of stocks start to plummet, but also subsequently recover.
In short, this article covers various stock trade orders such as market, limit, stop-loss, and stop-limit. It’s important you learn all of these concepts to familiarize yourself how certain trade orders work and why they are important when investing in the market.
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