How to Place Different Order Types
When you place an order with your broker you do so because you want to:
1. Buy a security which can be a stock, bond, option or a future
2. Sell a security which can be a stock, bond, option or a future
When you buy a security you are actually going long that security. When you sell a security you do not own you are actually going short that security. Say you want to buy Microsoft (msft) 100 shares, you will tell your broker to "buy to open 100 msft shares". Once you have bought the 100 msft shares you will now be long 100 msft shares. Now that you own 100 msft shares and you want to sell them you will tell your broker, "sell to close 100 msft shares".
When you sell a security you do not own, you are actually going short that security. Say you want to sell Microsoft (msft) 100 shares, you will tell your broker to "sell to open 100 msft shares". Once you have sold the 100 msft shares you will now be short 100 msft shares. Now that you are short 100 msft shares and you want to buy them back to cover you position, you will tell your broker, "buy to close 100 msft shares". To go short a security you do not own you will need a collateral called a margin.
Over time different order types have been designed to meet specific customer trading needs. These needs include limiting risk, fast execution, price improvement, use of discretion and proper timing. These order types include the following:
1. Market order - a market order is an order to buy or sell an asset at the bid or offer price currently available in the marketplace. It's the most basic order type and ensures your order has to get filled at the current market price. If the market is dropping very fast, this order can sometimes get you a lower price than you would have expected. This order is used in Stocks, Options, Futures, Futures Options, Bonds, Warrants, Forex. If therefore you want to buy 100 shares of msft, you may tell your broker "buy to open 100 shares of msft at market".
2. Limit Order - a limit order is an order to buy or sell a contract at a specified price or better. It's the most secure order type and ensures your order may get filled at the price you specify. However, the market may leave you as you stick with that price you believe is right. Limit orders are available for Stocks, Options, Futures, Futures Options, Bonds, Warrants, Forex. If therefore you want to buy 100 shares of msft at $36, you may tell your broker "buy to open 100 shares of msft at limit $36".
3. Stop Market Order - A Stop Market order becomes a market order to buy or sell securities once the specified stop price is attained or penetrated. A Stop order is not guaranteed a specific execution price. It is mostly used in stop loss orders but can give you results that are far away from expectations especially when the market gap up or down.
4. Stop Limit Order - A Stop Limit order becomes a limit order once the specified stop price is attained or penetrated.
5. A Discretionary Order is a limit order for which you define a discretionary amount (which is added to or subtracted from the limit price) that increases the price range over which the order is eligible to execute. The original limit price is displayed to the market.
6. Trailing Stop Order - A trailing stop for a sell order sets the stop price at a fixed amount below the market price. If the market price rises, the stop loss price rises by this amount, but if the stock price falls, the stop loss price remains the same. A trailing stop for a buy order sets the stop price at a fixed amount above the market price. If the market price falls, the stop loss price falls by this amount, but if the stock price rises, the stop loss price remains the same.
7. Conditional Order - a conditional order is an order that will automatically be submitted or cancelled only if specified criteria for one or more defined contracts are met. For example, you can say this: Buy 100 shares of msft if Nasdaq Composite go below 2000
Time in Force for Orders: The time in force for an order defines the length of time over which an order will continue working before it is canceled
1. DAY - A Day Order is canceled if it does not execute by the close of the trading day. Unless you specify otherwise, every order is a Day order.
2. GTC - A Good-Til-Canceled order will continue to work in the marketplace until it executes or is canceled by the trader. GTC is used on Limit, Stop, and Stop-Limit orders. Depending on your stockbroker, GTC orders may be cancelled under certain conditions: For example if any type of corporate action is taken on a security and if you do not log in to your account for three months.
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