Anyone thinking about investing in stocks should learn the mechanics of entering a trade.
Without this basic understanding, trades may not be entered in the most efficient manner, leading to poor execution and possibly losses.
In this article, the basic types of trades that can be entered when buying or selling common stocks and other securities will be presented.
When placing an order with a broker, the broker will need the following basic information:
The number of shares/units is then indicated, followed by the name of the security.
After the name of the security, it is also helpful to provide the symbol since the broker will need to enter the information for the order.
For example, if an investor wished to buy 100 shares of International Business Machines, he would say: "Buy 100 shares of International Business Machines, symbol IBM.
" The broker would then typically read back the order to make sure it was correct, and then enter the order.
As said, the information given above is the minimal information that can be given and most brokerage houses would enter the trade as a market order.
In a market order the shares are bought at the "market price," which is the price at which another person is currently willing to sell the shares (or buy the shares if the investor is selling shares).
This is the most efficient way to buy or sell stocks because there is almost always someone waiting on the other side of the trade (and actually there are people called "market makers" who will step in and make the trade if there is not).
If the order is entered when the markets are not open, the trade will be executed at whatever the price is when the market opens the next morning.
Also note that in the case where there are several people in line for the same stock the trades are executed in the order in which they are received.
Another type of trade is a limit order.
In a limit order the shares are purchased (sold) if the price of the stock is at or above (below) a fixed price.
For example, if an investor wanted to make the trade above, but wanted to make sure she paid no more than $60/share, she would say: "Buy 100 shares of International Business Machines, symbol IBM, limit $60 or better.
" In this case if the stock was trading at $61 per share the shares would not be bought unless the price dipped down to $60 or less.
Also, if the shares dipped to $59 without touching $60, for example, the shares then would be purchased for $59.
The orders entered above are what are called day orders.
This means that they are cancelled at the end of the day.
With the market order, this does not matter because the trade will likely be made a few seconds after it is entered.
With a limit order, however, the stock may not reach the price during the day.
To avoid having to enter the trade every day, the investor can add the phrase, "Good 'til cancelled," or just "GTC.
" This tells the broker to enter the trade for 30 days.
If the order is still not executed after 30 days, the order is normally cancelled and will need to be reentered.
Those are the most basic order types.
Other modifications can also be made.
Some of these common modifications include: Stop Loss Order: An order that is executed if the stock goes below a certain price (for a "stop sell") or above a certain price (for a "stop buy.
") This type of order is often used to automatically sell a stock if it moves below a certain threshold.
For example, an investor may put in a stop sell 10% below the price of a stock he has just purchased so that the shares would be sold if the price drops by 10% or more as a way to limit losses.
A stop loss order can be further divided into a stop market or a stop limit.
A stop limit will be executed as a limit order at the stop price, while a stop market will be executed as a market order at the next trade.
All of None: Will only be executed if all of the shares can be bought or sold in one trade.
This is used in thinly traded stocks to avoid buying or selling only a few shares and paying higher commission rates.
Note that not all brokerages are allowing this option anymore.
Note that a lot of the trading has gone online where orders are entered by the investor into a webpage.
The websites, however, should give the trader the ability to enter the basic order types that were mentioned.
If not, it might be advisable to find a different broker.
Without this basic understanding, trades may not be entered in the most efficient manner, leading to poor execution and possibly losses.
In this article, the basic types of trades that can be entered when buying or selling common stocks and other securities will be presented.
When placing an order with a broker, the broker will need the following basic information:
- Whether the order is a purchase or a sale.
- Number of shares/units.
- Security to be purchased or sold.
The number of shares/units is then indicated, followed by the name of the security.
After the name of the security, it is also helpful to provide the symbol since the broker will need to enter the information for the order.
For example, if an investor wished to buy 100 shares of International Business Machines, he would say: "Buy 100 shares of International Business Machines, symbol IBM.
" The broker would then typically read back the order to make sure it was correct, and then enter the order.
As said, the information given above is the minimal information that can be given and most brokerage houses would enter the trade as a market order.
In a market order the shares are bought at the "market price," which is the price at which another person is currently willing to sell the shares (or buy the shares if the investor is selling shares).
This is the most efficient way to buy or sell stocks because there is almost always someone waiting on the other side of the trade (and actually there are people called "market makers" who will step in and make the trade if there is not).
If the order is entered when the markets are not open, the trade will be executed at whatever the price is when the market opens the next morning.
Also note that in the case where there are several people in line for the same stock the trades are executed in the order in which they are received.
Another type of trade is a limit order.
In a limit order the shares are purchased (sold) if the price of the stock is at or above (below) a fixed price.
For example, if an investor wanted to make the trade above, but wanted to make sure she paid no more than $60/share, she would say: "Buy 100 shares of International Business Machines, symbol IBM, limit $60 or better.
" In this case if the stock was trading at $61 per share the shares would not be bought unless the price dipped down to $60 or less.
Also, if the shares dipped to $59 without touching $60, for example, the shares then would be purchased for $59.
The orders entered above are what are called day orders.
This means that they are cancelled at the end of the day.
With the market order, this does not matter because the trade will likely be made a few seconds after it is entered.
With a limit order, however, the stock may not reach the price during the day.
To avoid having to enter the trade every day, the investor can add the phrase, "Good 'til cancelled," or just "GTC.
" This tells the broker to enter the trade for 30 days.
If the order is still not executed after 30 days, the order is normally cancelled and will need to be reentered.
Those are the most basic order types.
Other modifications can also be made.
Some of these common modifications include: Stop Loss Order: An order that is executed if the stock goes below a certain price (for a "stop sell") or above a certain price (for a "stop buy.
") This type of order is often used to automatically sell a stock if it moves below a certain threshold.
For example, an investor may put in a stop sell 10% below the price of a stock he has just purchased so that the shares would be sold if the price drops by 10% or more as a way to limit losses.
A stop loss order can be further divided into a stop market or a stop limit.
A stop limit will be executed as a limit order at the stop price, while a stop market will be executed as a market order at the next trade.
All of None: Will only be executed if all of the shares can be bought or sold in one trade.
This is used in thinly traded stocks to avoid buying or selling only a few shares and paying higher commission rates.
Note that not all brokerages are allowing this option anymore.
Note that a lot of the trading has gone online where orders are entered by the investor into a webpage.
The websites, however, should give the trader the ability to enter the basic order types that were mentioned.
If not, it might be advisable to find a different broker.