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Trading 101: Order Types Explained

A trade order is a command given to a broker to buy or sell stocks, commodities, or cryptocurrencies. With the advent of technology, some investors go directly to the trading venue and execute the order. However, they are not adequately acquainted with the types of orders needed for a successful trading experience. This article will cover the basic types of stock orders and when to use them.
Trading 101 - Order Types Explained

Table of Contents

Limit order

As the name implies, a limit order limits the price range that an investor can buy or sell. In a more straightforward sense, it is an order to buy or sell at a specified price. For instance, an investor wants to get shares of a company’s stock for not greater than $5. The investor can put a limit order for the amount. It will only activate when the price of the stock is $5 or lower.

Consequently, the order will not push through if the stock price is greater than $5. The order prevents investors from buying or selling stocks at a price level they don’t want. Still, this type of order has its downside. A limit order gives an investor no assurance that the order will push through. The order may only be suitable when an investor knows they can purchase lower than the current price.

Market order

A market order is the most basic trade order type. It is commonly used when an investor wants to buy or sell immediately at the current price. Also, it is popular with investors who want to buy or sell stocks or coins right away. This type of order will be executed near or equal to the current ask or bid price.

However, there is no guaranteed price as the markets are fast-paced and volatile. Investors should know that the prices fluctuate. They need to remember that the last price traded may not be the actual price when executed. Nonetheless, if done on stocks with high shares per day, the price will be close to the bid/ask prices.

Prices board

Stop order

A stop order, or a stop-loss order, is executed when the stock price reaches a specific threshold. The threshold is called the stop price. Once it is reached, the stop order switches to a market order. There are two types of stop orders.

The first one is the stop sell order. For instance, an investor wants to sell stocks for $30 per share. The stop order will be on idle mode up until the price reaches or drops below $30. Once it hits the stop price, it will turn to a market order and sell for the best available price.

A stop buy-order has the same concept. The investor commands a stop buy-order to buy stocks at a higher price (or the stop price) than its current one. Once it reaches the stop price, the order will convert to a market order.

Conditional order

Conditional order consists of two or more criteria set by the investors. If the conditions are not met at the same time, the order will not push through. It can be used best for investors who don’t want to monitor the market regularly. A conditional order combines different order types like limit and stop-orders to function.

For example, a stock is trading at $150 per share, and you want to buy some when the price lowers. Investors can put a stop buy order set at $130 and day order. These criteria mean the stock will be bought at the stop price and cancelled after the day ends.

Trailing Stop Order

A trailing stop order is much like an ordinary stop order but with a bit of adjustment. Typically, a stop order lets a trader determine a stop price below or above the market price. However, this time, the stop price is not specified. Alternatively, the stop price of this order type is either in percentage or in dollars and refers to as the trailing stop price.

True to its name, this stop order trails the market price when going in a more favourable direction. In contrast, the order will remain in its last position when the market price moves in a disadvantageous direction. A trailing stop order is more adaptable than a stop order as it adjusts automatically by following the market price.

Final Thoughts

If trading caught your attention, you are right if you think it offers a good investment opportunity in 2021. However, the different order types immensely impact your trading outcomes. It is essential to familiarise yourself with different ways you can manage your order. That way, you have a higher chance of getting the result you’ve envisioned. Learning technical analysis is also essential for getting better trading results. 

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