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Buying & Selling; Working with Order Types
In this week’s Traders Corner, we are going to be taking a look from the traders perspective as it relates to actually buying and selling stocks. Not too long ago, traders were quite limited in the way they placed their orders; they could either buy or sell a stock. This is about as basic as one can get when we talk about placing our trades on the open market.
As online trading surged in the late ‘90’s with the dot-com boom, many brokerages realized that traders were implementing strategies that were far ahead of the basic buy and sell mentality. As traders became more complex, so did the different types of orders. In today’s equity markets, there are a variety of ways in which a trader can set certain parameters on the orders that they place through their broker. Let’s take a look at some of the acronyms and what they actually mean.
Market Order
A market order is an order to buy or sell a stock immediately at the best price available. The primary caveat to market orders is that in cases where the bid/ask spread very wide, traders can be filled at a much higher price than they expect. In cases where stocks have especially low volume, this effect can be magnified. Market orders can be buys or sells.
For example….a trader wishes to immediately buy shares of stock XYZ. To do this, they place a buy market order. The current bid/ask on stock XYZ is 40.50 – 40.95. Because the trader is buying the stock at market price, the best fill price he or she can get is $40.95.
Limit Order
A limit order is an order to buy or sell a stock at a set price. Because the trader is able to designate their entry price, brokerages usually charge a premium for executing this type of order. Limit orders are appealing for most traders because it prevents them from overpaying for a particular stock. Limit orders also have some added flexibility because traders can also specify how long the limit order will remain active. Traders can set limit orders to be active for regular trading hours only or GTC (Good ‘Till Cancelled). Limit orders can also be buys or sells.
Stop Market Order
A stop market order is one that is used when a trader is already in an existing position. A stop market order is applied to limit the potential financial loss of a position. This type of order is designed to trigger on a threshold and exit the losing position at a price set by the trader. Here’s an example of how a stop market order works……A trader has bought stock XYZ at $35.50. Once the trader is in the position, the stock price begins to fall…..the trader places a stop market order at $33. This means that if the price falls to $33 or lower, the broker will immediately sell the shares the trader owns with a market order.
Stop Limit Order
The stop limit order is very similar to the stop market order. The primary difference of the stop limit order is that the stop loss is not a market order, but a set price at which the trader wants to exit the losing position. While the idea of having a stop loss is absolutely critical to becoming a successful trader, a stop limit order is somewhat risky. Let’s think of it this way….A trader buys a stock at $23, they then place a stop-limit order at $21.75. The stock begins to fall down to the $21.75 area but instead of hitting exactly $21.75, the stock gaps down to $21.50, never actually having a print at $21.75. Because this is basically a limit order, the stop never triggered and the trader is stuck with a falling position. This is similar to having a safety net under a trapeze artist with a large hole in the middle of it.
FOK (Fill or Kill)
Fill or Kill is a type of trade condition that is placed on both limit and market orders. A FOK condition stipulates that the all of the order must be filled immediately and completely or not at all.
IOC (Immediate or Cancel)
An Immediate or Cancel condition is one that stipulates that all or part of the order is executed immediately after the order is placed. Any part of the order that remains unfilled is immediately cancelled.
OCO (Order Cancels Order)
An OCO or Order Cancels Order condition is a trading strategy that has gained popularity over the past few years. This type of strategy is also referred to as a bracket order. Let’s work with an example to see how they are structured.
A trader buys 100 shares of stock XYZ at $20. The trader immediately places two additional orders. The first of these orders is a stop market order; this part of the trade that covers the trader from losing more than they are comfortable with. The second part of the order is the profit target. This is the area where the trader is looking to take profits if the trade goes their way. The primary caveat to the OCO trade is that once one of the two secondary orders is filled; it automatically cancels the other side of the order. So…continuing on with our example, if the trader gets stopped out, the profit target order will cancel. If the trader reaches the desired profit target, the stop-loss will be automatically cancelled.
In this week’s Traders Corner, we are going to be taking a look from the traders perspective as it relates to actually buying and selling stocks. Not too long ago, traders were quite limited in the way they placed their orders; they could either buy or sell a stock. This is about as basic as one can get when we talk about placing our trades on the open market.
As online trading surged in the late ‘90’s with the dot-com boom, many brokerages realized that traders were implementing strategies that were far ahead of the basic buy and sell mentality. As traders became more complex, so did the different types of orders. In today’s equity markets, there are a variety of ways in which a trader can set certain parameters on the orders that they place through their broker. Let’s take a look at some of the acronyms and what they actually mean.
Market Order
A market order is an order to buy or sell a stock immediately at the best price available. The primary caveat to market orders is that in cases where the bid/ask spread very wide, traders can be filled at a much higher price than they expect. In cases where stocks have especially low volume, this effect can be magnified. Market orders can be buys or sells.
For example….a trader wishes to immediately buy shares of stock XYZ. To do this, they place a buy market order. The current bid/ask on stock XYZ is 40.50 – 40.95. Because the trader is buying the stock at market price, the best fill price he or she can get is $40.95.
Limit Order
A limit order is an order to buy or sell a stock at a set price. Because the trader is able to designate their entry price, brokerages usually charge a premium for executing this type of order. Limit orders are appealing for most traders because it prevents them from overpaying for a particular stock. Limit orders also have some added flexibility because traders can also specify how long the limit order will remain active. Traders can set limit orders to be active for regular trading hours only or GTC (Good ‘Till Cancelled). Limit orders can also be buys or sells.
Stop Market Order
A stop market order is one that is used when a trader is already in an existing position. A stop market order is applied to limit the potential financial loss of a position. This type of order is designed to trigger on a threshold and exit the losing position at a price set by the trader. Here’s an example of how a stop market order works……A trader has bought stock XYZ at $35.50. Once the trader is in the position, the stock price begins to fall…..the trader places a stop market order at $33. This means that if the price falls to $33 or lower, the broker will immediately sell the shares the trader owns with a market order.
Stop Limit Order
The stop limit order is very similar to the stop market order. The primary difference of the stop limit order is that the stop loss is not a market order, but a set price at which the trader wants to exit the losing position. While the idea of having a stop loss is absolutely critical to becoming a successful trader, a stop limit order is somewhat risky. Let’s think of it this way….A trader buys a stock at $23, they then place a stop-limit order at $21.75. The stock begins to fall down to the $21.75 area but instead of hitting exactly $21.75, the stock gaps down to $21.50, never actually having a print at $21.75. Because this is basically a limit order, the stop never triggered and the trader is stuck with a falling position. This is similar to having a safety net under a trapeze artist with a large hole in the middle of it.
FOK (Fill or Kill)
Fill or Kill is a type of trade condition that is placed on both limit and market orders. A FOK condition stipulates that the all of the order must be filled immediately and completely or not at all.
IOC (Immediate or Cancel)
An Immediate or Cancel condition is one that stipulates that all or part of the order is executed immediately after the order is placed. Any part of the order that remains unfilled is immediately cancelled.
OCO (Order Cancels Order)
An OCO or Order Cancels Order condition is a trading strategy that has gained popularity over the past few years. This type of strategy is also referred to as a bracket order. Let’s work with an example to see how they are structured.
A trader buys 100 shares of stock XYZ at $20. The trader immediately places two additional orders. The first of these orders is a stop market order; this part of the trade that covers the trader from losing more than they are comfortable with. The second part of the order is the profit target. This is the area where the trader is looking to take profits if the trade goes their way. The primary caveat to the OCO trade is that once one of the two secondary orders is filled; it automatically cancels the other side of the order. So…continuing on with our example, if the trader gets stopped out, the profit target order will cancel. If the trader reaches the desired profit target, the stop-loss will be automatically cancelled.