When you visit your favorite restaurant, the waitress asks you how you want your steak cooked – rare, medium, medium rare or well done. The same could be said when you’re buying or selling stocks. Being aware of the different type of orders, particularly stop loss orders, can help you buy cheaply and avoid major losses.
Marker Orders
When an investor is looking to purchase or sell shares quickly, they would enter a market order. A market order would execute the purchase or sale of securities at the current market prices. For example, Jim is looking to purchase 100 Apple shares. He enters the purchase in his brokerage account and the shares fill at $300 per share. Jim has spent $30,000 on 100 shares of Apple. His book value is $30,000.
Stop Loss Orders
In order for an investor to limit their losses during a market downturn, they could set stop loss orders. A stop loss order would sell your shares if the stock price hits the price that you’ve set as your stop loss. For example, Jim bought 100 shares of Apple stock at a price of $300. He is worried that a market downturn may cause him to lose his invested capital so he sets up a stop loss of $280 per share. If the price hits $280, his stop-loss order would become a market order and the shares will be sold at $280 and whatever price available. Stop loss orders are a great way to minimize losses.
Trailing Stop Orders
A slight variation to the stop loss order is a trailing stop order wherein the sell order will happen only when the share price falls below a certain percentage. For example, Jim’s Apple shares are trading at $300 per share. He is comfortable accepting a 10% loss and would set up a trailing stop order of 10% which is $270. If the shares of Apple rise up to $320, Jim’s trailing stop order would still be 10% but the selling price would rise to $288.
Limit Orders
Investors must be aware of the price fluctuations between the order time and when the trade is executed. To account for this risk, you may set up a limit order. A limit order would allow you to buy or sell at a specified price. For example, Jim is looking to sell his 100 Apple shares at $350 so he sets up a Sell Limit Order of $350. The shares will not be sold until the price hits $350.
Stop Limit Order
A stop limit order combines the protection of a stop loss order with a limit order. For example, Jim has a stop loss order set at $280 for Apple shares. He adds a limit of $270. Jim would accept any price from $280 to $270. If the stock falls below $270, the shares will not be sold.
Keep in mind that brokerage firms charge the same amount of commission regardless of your order type. Orders can be day orders to expire at a certain date.
