From our lessons, we have learned that to make money off a stock we have to buy at a lower price and sell at a higher price. The price of a stock is constantly moving throughout the day. We have also learned how to do our due diligence on a stock by researching the company for potential value and looking at historic price charts to see if it is a good time to buy. In today’s article, I’m going to be teaching you about the tools you can use to get a stock at the price you want and also some ways to protect yourself if a stock ends up being a loser. These tools allow you the freedom to put your account on autopilot so that you do not have to constantly watch prices all day.
Whatever brokerage firm you go with to open an account, each one will have its own personal software that you use to place trades. The bells and whistles on these platforms vary as far as how advanced they are but the order entry is going to be the same across all of them. Below I’ve posted a few photos of some different platforms order entry pages.
As you can see they all ask you to put in the same information.
- Stock Name/Ticker Symbol
- Share Quantity
- Order type
- Stop Limit
- Good till Cancelled (GTC)
If you are using a certain dollar figure to order a stock you can just divided the price of the stock by the dollar amount to give you the number of shares you’d like to buy. Often times the platform will have a calculator already available and make the computation for you.
Let’s go through the order types now as they will be most important.
A market order is the most basic of any order to buy or sell a stock. Remember when we talked about the bid and ask? Well this comes in to play here. The bid and ask will be displayed for you when you mock up the trade. Whenever you place a market order to buy a stock you are going to get whatever the ask price is at the time. On the opposite end, when you are ready to sell a stock, a market order will be whatever the bid price is at the time. The key with market orders is that they are executed IMMEDIATELY. This ensures that you enter or exit a stock depending on if you are buying or selling.
Think of a market order like going shopping for some meat at the supermarket. You really want some ham and you will pay whatever price it is selling for right now. If the deli says the ham is 1.50 /lb then that’s what you will pay.
A limit order is best used when you want a certain price for a stock. Let’s say you want to buy some of Nike stock. Right now it’s trading at a price of $24.35 but you say I only want to buy if the price is at $24.01. You can place a limit order for that price and your order will only get filled if it hits that price. A limit order guarantees you price but it does not guarantee you execution. Nike’s stock price could never touch $24.01 all day and after the market closes your order would expire. Limit orders can also be used when you are selling a stock as well. Let’s say you bought Nike and wanted to lock in your profits at $100. If the share price touches $24.50 for you that would be $100-dollar profit so you put in an order to sell your shares at that price of $24.50. If it touches that price you would sell out and make your profit. Keep in mind that a limit order is going to fill you at your limit price OR BETTER. This means that if Nike was trading at $24.75 and you put in a limit order to sell shares at $24.50 then your order will get filled instantly because it is trading higher than your limit.
Going back to our previous deli example, say you only wanted to buy ham if it was 1.25. You would wait till it hit that price before you made your purchase.
You can think of a stop order as a trigger. You are saying that if the stock passes through a certain price you want your order to trigger. A stop order that is triggered automatically becomes a market order and executes at the next available price. For example, let’s say Nike was trading at $24.01 and you think that if its share price passes $24.50 then there will be a price breakout and you would like to buy shares. You can put in a stop order at $24.50 so that you can guarantee your entry into the stock. This does not necessarily mean that you will get your order filled at $24.50. Remember once the stop is triggered it becomes a market order and fills at the NEXT available price. This could be $24.50 but it could also be $24.48 or $24.55 depending on how the stock is moving. The inherent risk with these orders is if the stock you are trying to buy is moving around quickly in price. You could potentially get filled at a much higher price than you intended if the stock’s price jumps.
Going back to the deli you say to yourself I will buy this ham if it gets below at price of 1.30/lb. If it does I will pay anything lower than that.
Using stop order to sell
You can also use these orders to sell a stock. To mitigate your risk, you could say I want to sell Nike if it touches $23.50 and place a stop order at that price; also known as a stop loss. If Nike decreases to that price you will sell your shares and cut any losses that might have cost you a great deal of money.
Stop Limit Order
Finally, the last order we will be talking about is a stop limit order. As it sounds it’s a combination of a stop and a limit order. In the previous example with a stop, we saw the risk of the price moving around on us in our attempt to get filled. With a stop limit, the stop still acts as a trigger but you also set a limit price so that you guarantee the price you are looking for. The downside is just like a regular limit order. This method of trying to get an order filled guarantees you price but does NOT guarantee execution. With the stop limit order, you set two prices, one for the stop and one for the limit. Using our previous example, let’s say you still thought Nike would be good to buy if the price touched $24.50 but you would only want to get filled at $24.52. Your stop would be $24.50 and your limit would be $24.52. Your stopped could be triggered but then never touch your limit price and you would not be filled. At the end of the day if it did not touch that price your order would expire.
Going back to our deli example, you say to yourself I would like to buy this ham if it’s above 1.00/lb but I will want to pay a price of 1.25/lb. If it is not 1.25/lb then I do not want to buy it.
Day order vs Good till Cancelled (GTC)
When you are mocking up a trade, one of the final selections you will have to make is whether you want the order to be a day order or good till cancelled. A day order is good for that trading day. If your order does not get filled that day it will expire as soon as the market closes. Like we saw with our examples of trading limit orders where you are not guaranteed execution, the orders could very well end up expiring. A good till cancelled order or GTC order as you will see is good for 60 calendar days. This means that if your order does not get filled one day it will remain open for the next 60 days or until you cancel manually yourself. People like to use GTC order when they don’t want to watch the stock all day long or want to keep orders open to protect themselves if a stock price starts falling to a certain amount. (Think again of a stop loss order)
- Market orders execute immediately at next bid/ask price
- Limit orders guarantee price but do not guarantee execution
- Stop orders act as triggers and become market orders to execute at next available price
- Stop limit orders act as a trigger AND guarantee price but do not guarantee execution.
These orders can be great tools to you with helping entering and exiting a trade without having to watch the market all day. Most people do not have the time to do that and quite frankly who would want to? I certainly don’t want to watch numbers move all day and I wouldn’t want to put myself through that emotionally. As time goes on you will learn how to master these orders to get the prices you want and protect yourself against downside risk.
Homework: Think of our last lesson on technical analysis and think of how you could use these orders to your advantage. Look at 3 stock charts and come up with a strategy using these order types to get into a stock that has the possibility of a breakout.