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jueves, 25 de diciembre de 2014

Different types of orders for trading

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Market order

An order to buy or sell a stock immediately at the current market price. When placing a market order to buy, the trader should watch the Ask price, because that is the price at which the share is purchased. When the trader wants to sell with a market order, he or she should watch the Bid price because that is the price at which the share is sold. Market Orders can not guarantee a particular price, but is almost always very close to the bid or ask. Although the price is not guarantee, a market order guarantees that you will buy or sell all stocks requested.

Limit order

This is an order to buy or sell a stock at a specified price, or sometimes better. For example, suppose that you place a limit order to buy the stock of ABC at $14.45. So you will buy the stock at that price when the Ask price falls to the limit price or if someone sells at market price and you are the first in line to buy. If you place a limit order to sell ABC at $14.60, you will sell at that price or better when the Bid price reaches that price, and you are the first in line. You may buy lowest than the limit price if the order was placed at night and the stock is sold at less than its limit price. For example, if your order was placed at $14.45 and the stock opened at $14.20 the next day, you buy below $14.45. The order does not mean that a trader can sell or buy the overall position, but it guarantee a price. The limit orders are used if you want to sell your shares at a specified price without having to monitor the market all the time, or if you want to buy at a lower market price.

Stop Order

This order is a signal to sell or buy shares when the market reaches the desired price. It works differently than the limit order. This is used more as protection if a stock experience a sudden drop in the price or if your short position increases at a certain price. For example: suppose that you buy ABC at $14.50 and you are concerned that the market could fall in the next days. To protect yourself, you put a stop order at $14.00. If the share price falls to $14, the stop order sell your shares in the market. The stop order becomes a market order when the stock goes down to the price you asked.

Trailing stop order

This order works like the stop order but the trader specify a percentage which indicates where a stock can be bought or sold. The trailing stop is automatically adjusted if the stock rises/falls to the percentage you chose. For example: suppose that you want to sell ABC shares if the price falls over 10%. You bought the stock for $14.50, so if drops to $13.05 a stop order gives signal to sell the stock. If ABC rises to $15 then the stop order is set to sell the shares if the price drops to $13.50. The order is adjusted continuously as the stock rises. This helps you limit your losses and hold your gains. In other words, is a stop order that "follow" the price.

Stop / Limit order

The stop limit works like a stop order where the order to buy or sell will be signaled when the stock price falls/rises to the requested price. But the system will not sell, for example, if the stock drops below the limit price. Remember that the stop ensures that the stock will be sold if it falls (or rises) to a certain price but it does not guarantee the price at which the shares will be sold.. For example: suppose that you put a stop order to sell ABC if the price drops to $14 and the stock is at $15 right now. One morning the stock opens at $13; your stop order is set to sell your shares at this price because the market is below $14. Some investors do not necessarily want to sell if the stock falls too much in one day. Maybe they are waiting that the stock price rise again or buy more shares at a lower price. With a stop limit the trader may indicate that the shares will be sold at $14 but not less than $13.75. In this example, the stock would not be sold at $13 but once the share price raise between $13.75 and $14, the sell trade will be executed.

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