We've decided what we want to invest in. How do we place a trade?
Brokerages connect us with the financial markets and offer services to help us buy and sell our assets. Brokerages require instructions from us to tell them exactly how we like our investments purchased and sold. Let's review the set of instructions we can provide.
The video below will help us hit the ground running.
The different orders
When time matters
Market orders are the fastest orders.
We use a market buy order when we want to buy a stock as soon as possible. When we submit a market buy order, the brokerage will match us with a seller at the best available (lowest) price. There is no guarantee when submitting a market buy order that we will find a seller at the last quoted price. In a time of high demand, we could end up paying a lot more than the price shown.
Similarly, we want to use a market sell order when we need to sell a stock as soon as possible. The brokerage matches us with a buyer at the best available price (highest). The outcome can be higher or lower than expected if the market is moving quickly.
When price matters
Limit orders let us set a price.
We use a limit buy order to set the maximum per-share price we are willing to pay. The sellers who are eager to sell at that price will sell us their shares in the order they arrive. These orders protect us from wild price swings.
We use a limit sell order to set a minimum per-share price we are willing to sell. Any buyers who meet us at our offer will buy our shares depending on the amount available.
When trading individual stock
Stop orders give us more control.
When buying individual stocks, a stop buy order allows us to capitalize on an upswing. To do so, we set the stop price to be higher than the current market price — if the stop price is equal to or lower than the current market price, the stop loss buy order becomes the same as a market order since the criterion is true.
A stop loss sell order helps protect against downward price movements. The stop price is set lower than the current market price, and once put in place, if our stock price starts dropping beyond the stop price we had set, the trade executes as a market sell order and potentially limits our losses before the stock plummets further.
This order may not provide sufficient protection in rapidly declining markets as the market price can be much lower than our stop price. A major drawback is if the markets recover after a sharp crash, and we sold at the lows.
We can use a stop-limit buy order to help prevent us from overpaying. In practice, the limit price should be higher than the stop prices, or else this would be the same as a stop loss buy order.
We can use stop-limit sell order to lock in some gains on some of our winners. The limit price needs to be set lower than the stop price, or it becomes a stop-loss sell order.