Buy and sell orders in stocks-WWNEED.COM
There are many buy and sell orders in stocks, each of which can lead to vastly different results and different returns. So it is very important to understand and understand the difference between them.
It is very useful and important for you as a trader or investor to think of each order type as a distinct and appropriate tool according to each of its own investment purposes. Whether the investor wants to buy or sell stocks, he should define his primary goal in advance, whether it is a matter of quickly executing his order at the prevailing market price or controlling the price of his trading. Only then, will he be able to determine the type of order that is most appropriate and best for him in order to achieve his investment objective.Determining the appropriate order type is the first step that a trader or investor must take. Let us now learn about the most important buying and selling orders in stocks.
Market orders to buy and sell stocks
Market orders are orders to buy or sell shares, made at the best price currently available in the market. Market orders in stocks usually guarantee execution, but they do not guarantee a specific price. Market orders are optimal when the primary objective is to execute the trade immediately. A market order is generally appropriate when a trader or investor believes the stock has been priced correctly, or when they are certain they want to fill the order and get immediate execution.
Some caveats: The stock price usually includes the highest bid (for sellers), the lowest bid (for buyers), and the last trade price. However, the last trade price may not necessarily be the current price, particularly in the case of less liquid stocks whose last trade may have occurred minutes or hours ago. This may also be the case in fast-moving markets, where share prices can change dramatically in a short period of time. Therefore, when placing a market order, the current bid and ask prices are generally more important than the last trade price.
In general, market orders should only be placed during market hours. A market order placed when the markets close will be executed at the next market open. This could be significantly higher or lower than the previous closing price. Between market sessions, many factors can affect the share price such as the release of earnings, company news, economic data, or unexpected events affecting a specific industry or sector or the market as a whole.
Limit orders to buy and sell shares
Limit orders are orders to buy or sell shares with a limitation on the maximum price that must be paid or the minimum price that will be received (“limit price”). If the order is executed, it will only be at the specified price or better. However, there is no guarantee of implementation. A limit order may be appropriate when you think you can buy lower than – or sell higher than – the current price.
The above chart shows the use of market orders versus limit orders. In this example, the last trade price was approximately $139.
A trader who wants to buy or sell the stock as soon as possible will place an order in the market and it will in most cases be filled immediately at or near the current price of the stock of $139 (the white line) provided that the market is also open when the order is placed and unforeseen market conditions prohibit regular.
A trader who wants to buy the stock when it drops to $133 would place a limit buy order at $133 (the green line). If the stock drops to $133 or less, the limit order will be triggered and the order will be executed at $133 or less. If the stock fails to fall to $133 or less, no execution will occur.
A trader who wants to sell the stock when it reaches $142 will place a limit order to sell at $142 limit price (red line). If the stock rises to $142 or higher, the limit order will be triggered and the order will be executed at $142 or higher. If the stock fails to rise to $142 or more, no execution will occur.
A trader who wants to sell the stock when it reaches $142 will place a limit order to sell at $142 limit price (red line). If the stock rises to $142 or higher, the limit order will be triggered and the order will be executed at $142 or higher. If the stock fails to rise to $142 or more, no execution will occur.
Note, however, that even if the stock reaches the specified price, your orders may not be executed because there may be orders prior to your order to supply the shares at the specified price. (Limit orders are generally executed on a first-come, first-served basis). Note also that with a limit order, the price at which the order is executed can be lower than the limit price, in the case of buy orders, or higher than the limit price, in the case of sell orders.
If a limit order to buy at $133 is set as “good” until cancelled, rather than “only a day,” it will remain in effect on the next trading day. If the stock opens at $130, a buy limit order will be triggered and the buy price is expected to be around $130 – a more favorable price for the buyer. Conversely, with a sell limit order at $142, if the stock opens at $145, the limit order will be triggered and will be executed at a price close to $145 – again, more favorable to the seller.
Stop orders to buy and sell stocks
Stop orders are orders to buy or sell a stock at the market price once the stock trades at or through a specified price (“stop price”). If the stock reaches the stop price, the order becomes a market order and is executed at the next available market price. If the stock fails to reach the stop price, the order will not be executed.
A stop order may be appropriate in these scenarios:
When a stock you own is going up and you want to try to protect your gains in case they start to go down.
When you want to buy a stock and it breaks above a certain level, believing that it will continue to rise.
A sell stop order is sometimes referred to as a “stop loss” order because it can be used to help protect unrealized gains or seek to minimize a loss. A Sell Stop order is entered at a stop price lower than the current market price; If the stock falls to the stop price (or trades below it), the sell stop order is triggered and becomes a market order that gets executed at the current market price. It is not possible to guarantee that a Sell Stop order will be executed near the stop price.
Stop orders can also be used to buy. A Buy Stop order is entered at a stop price higher than the current market price (essentially “stopping” the stock from moving away from you while it is rising).
Let’s revisit our previous example, but look at the potential effects of using a stop order to buy and a stop order to sell – with the stop prices identical to the limit prices used previously.
While the two charts may look similar, note that the positions of the red and green arrows are reversed: a sell stop order will trigger when the stock price reaches $133 (or lower), and will be executed as a market order at the current price. Therefore, if the stock falls further after the stop price is of $142 is reached, the order can be executed at a higher price.
What are price gaps?
A price gap occurs when a stock price makes a sharp movement up or down with no trade-off in between. This can happen due to various factors such as earnings announcements, a change in analyst outlook, or due to a press release. Gaps frequently occur at the opening of major exchanges, and when news or events outside trading hours create an imbalance in supply and demand.
Stop orders and price gaps
Remember, the main difference between a limit order and a stop order is that a limit order will only be executed at or better than the specified limit price; Whereas, once a stop order has been placed at the specified price, it will be executed at the prevailing market rate which means that it can be executed at a price that is significantly different from the stop price.
The following chart shows a stock that “dropped” from $29 to $25.20 between the previous close and the next open. A Sell Stop order at the $29 stop price, which would have triggered when the market opens because the stock price fell below the stop price, is executed at $25.20. This can happen for much less than expected, and worse for the seller.
In a similar way the “gap down” can work against you with a sell stop order. And sometimes, the “gap up” can work in your favor in the case of a sell limit order, as shown in the chart below. In this example, the order to sell is placed at a limit price of $50. The stock’s previous closing price was $47. If the stock opens at $63.00 due to positive news from the previous market close, the trade will be executed when the market opens at that price – higher than expected, and better for the seller.
Summary
Many factors can affect the buying and selling of stocks. In addition to being able to use different order types, traders can specify other conditions that may affect order execution time, volume or price restrictions. Before placing any orders to buy and sell stocks, try to familiarize yourself with the different ways you can control your order. This way, you will be better able to get the result you are after.
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