Experts know there are 5 different types of order you need to know about when it comes to trading stocks, and here is the skinny on each type of trade:
1. Market Orders. Use a market order when you want to get in or out of the market, no matter what. It lets you get in or out at the best market price, using the nearest bid or ask (buy price or sell price) at that moment. Do not use a market order in a thinly traded market, especially one that isn't trading actively, since there may be no one to match your order with, and this leaves you open to dangerous consequences.
Since the price you get (or pay) is unknown, you should have some risk tolerance for this order type. Luckily in strong fast moving markets, market orders are one of the only ways to ensure you get in or out of the market.
2. Limit Order. This is an order that executes at a specific price that you set (or better) and can be open for a specific time period. While a limit order will prevent you from buying or selling your stock at a price that you don't want, if the price is way off base, the order will never execute.
Sometimes your broker will charge a bit more for limit orders, since they can often remain unfilled, and it requires more of their time to monitor and process the order.
3. A stop order. This is an order that says "do not do anything unless this happens...", so on a stop-limit normally you set it to sell your shares if it hits a certain low. In rare cases, people use stop buy orders, but they can be very dangerous. One your criteria is met, your order is executed at the market (no set price).
4. Stop-Limit Orders. A stop limit order is a limit order that is activated if a certain condition is met. These are often the riskiest types of orders, since a condition can be met (such as the bottom falling out of a share (e.g. Fannie Mae), but you activate a limit order at a price that is above the market, and never gets filled.
5. Trailing Stops. A trailing stop lets you lock in profits, by monitoring trading, and activating a sell order (or buy order, if you are in a short position) if the item being traded drops off its latest high (or low, in the short position example).
These order types are very important to master in every financial market, since using the right order type in a particular market condition is essential to profiting from good stock tips.
That is because some order types do better in different market conditions.
To master the order types and knowing when to use each type, you should practice paper trading without real money, until you understand how the order types operate, and how they affect profitability.
Once you feel confident about your knowledge of each order type, and when to use them, you can switch over to a real trading account and know you have the skills to use the right order types effectively.
It does not take very long at all to master these five order types, and once you know it, you can apply it for the rest of your trading career, and become a powerful force in the online trading world.
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