As featured in the Herald Sun – Friday 5th August 2016.
By David McCulloch – Market educator and consultant to Share Wealth Systems
Market orders are popular for investors that are not too concerned about the current price of a stock and just want to take a position as soon as possible. An advantage of market orders is that you are generally assured of getting your position filled. When a market order is placed it will be executed at whatever price the stock is currently trading at.
Limit Buy Orders
Limit Buy orders are orders to buy at a designated price. Limit orders to buy
are placed below the stock’s current market price. Since the market may never get low enough to trigger a limit buy order it is possible that your order may not get filled, and this can be frustrating depending on your investing plan.
Even though the market price may touch your limit price several times, it does not necessarily guarantee that your order will be filled. Limit Buy orders are also commonly known as “falling buy” orders.
Stop Buy/sell Orders (on stop)
Stop orders can be used in a variety of ways. Commonly referred to as “on stop” orders, they will only be triggered once price reaches that pre-determined level. In the case of going long (buying a stock with the expectation that it will move up), a buy on-stop order is placed above the current market price. Once that level is reached, your order then becomes a “market order” and will be filled at the current market price. That price may be above or below your “on stop” level and will depend on how fast the market orders are flowing at that time. If the market is moving quickly then your order may experience a significant difference in its fill price, and this is commonly called “slippage”. Buy on stop orders are also known as “rising buy” orders. On stop sell orders are useful for protecting profits on open positions and reducing risk on new trades. On Stop sell orders are commonly referred to as falling sell orders.
Stop-Limit Orders (on stop with a limit)
A stop-limit order lists two prices and is an attempt to gain more control over the
price at which your stop is filled. The first part of the order is written like the on-stop
order. The second part of the order specifies a limit price and this is the upper limit in price that you are prepared to pay. That means that once your on-stop order is triggered, you do not wish to be filled beyond the limit price. Stop-Limit orders are particularly useful for trading in markets that may experience significant gaps, such as some of the commodity markets as they help the trader reduce the chances of getting into a position way above their intended entry levels.
Limit orders to sell are usually thought of as an order to sell at a profit target for example. Limit sell orders are commonly referred to as rising sell orders as price must rise to the limit in order to be triggered.
David McCulloch is a market educator and consultant to Share Wealth Systems.