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 Order. A market order is a request to purchase or sell a stock at the current market price. Market orders are pretty much the standard stock purchase order.
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. A limit order. Limit orders are orders to buy or sell at a particular price. This is good if you really need to get the price you specify, or if the market is choppy - moving up and down too fast to keep up with, but you don't want to get caught on a sudden change in market direction.
It's important to note that some brokers charge more for limit orders. Why? Simple because no execution means no commission.
3. Stop Order. This is a market order that is triggered once your stock reaches a specific target price, the stop price. Stop orders may also be called stop-loss orders, because they help investors put constraints on their losses.
4. A stop-limit order. This is just like the stop order, but with a set price. For example, you set a stop limit sell on IBM at 100. IBM drops to 100, and your "sell at 100" order is activated, but if IBM drops to 99 and continues to drop, your order may never be 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).
This information is going to come in VERY handy when you're mastering market stock trading, because the order type will determine how profitable you are.
Simply put, some orders perform better than all the others in a certain market condition. For example, in October 1987 (Black Monday), stop limit orders caused many people to get caught with huge loses on their hands.
To get up to speed on these order types, be sure to practice trading without real money, and get used to trading and seeing which order type performs best in each market condition.
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 long before you will be on par with the professional traders, who trade with the precise order type with every trade they make. And remember, these order types work in all markets, including shares, options, commodities and foreign exchange markets.
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