You should know that trading in stocks online isn’t like shopping at your local major vendor, where prices are set. There are techniques to selling and buying because investments are priced in real time through active bidding between sellers and buyers. You have 5 main ways to sell or buy them online when dealing with investments:
- Market orders is the most common type of order. You tell your broker to buy shares at the current price or to sell your shares at the best price. They usually have the lowest commissions because these orders are performed more or less immediately and are straightforward.
- Limit orders: You tell your online broker with a limit order the price you are willing to pay if you are buying and the price you are willing to take if you are selling stocks. Only if your price is reached the order will execute.
Imagine you own hundred shares of ABC Company, which are trading for fifty dollars a share. The stock was on a tear, but approximation is that it could fall to thirty dollars. Also, you can sell the stock outright with a market order, but you do not want to miss out on any gains in case you are wrong. If it fell to forty five dollars a share a limit order would let you instruct your broker to sell the stock.
Only at the price you set limit orders are filled. The broker might be able to sell only some of the shares if the stock falls further than the price you set, or none, at the price you set.
- Stop market orders: Close to boundary orders stop market orders allow you set a price you want to sell or buy shares at. The order converts into a market order and executes immediately when a stock hits the price you designated.
Imagine that you have hundred shares of ABC Company, which are trading for fifty dollars a share. However this time, you enter a stop market order for forty five dollars. And again, you wake up to find the stock plunged instantly to twenty five dollars. This time, although, all of your stock would have been sold. However, your online broker is going to sell the shares at whatever the price was the moment your order transformed to a market order, which in this case could have been twenty five dollars.
- Stop boundary orders are customizable. You can set the activation price at first. The order turns into a limit order with the limit price you have set when that price is hit.
Okay, ABC Company is trading for fifty dollars a share when you enter a stop limit order with an activation price of forty five dollars and a limit price of thirty five dollars. So, it would work like this: you wake up to find that the stock plunged instantly to twenty five dollars. Your broker would turn your order into a limit order after it fell below forty five dollars this time.
When the stock fell to thirty five dollars, the broker would try to fill orders at that price if possible. However different from the stop market order, you will not leave the shares when they fell low to twenty five dollars.