Placing Orders And Order Types

Order placement

If you have traded securities before, you may already have some knowledge about placing trade orders. Here, we’ll show you the basics of different buy and sell orders.

Types of buy orders

• Market order: With this order type, you specify how much of the security you want to buy and when to buy them. The order is executed at the best market price at the time of purchase. This means you might have to pay a high price if you buy and receive a low price if you sell. You only have an idea about the price you get. If you trade highly liquid markets, a market order is relatively safe and won’t give you negative surprises. However, if you trade illiquid assets you have to be very careful in using market orders!

 

• Limit order: You specify how much of the security you want to buy and the maximum price you are willing to pay. The order is executed when the market trades at or below your limit level. Limit orders can be linked to the opening or closing price, but most often, the order is valid for an entire trading day.

 

• Stop Market Order: You specify how much of the security you want to buy and also state a stop level that must be reached before a market order can be triggered to buy the security. The stop level is above the current market price of the security. When the price rises to the stop level, a market order is issued to buy the security at the market price. The idea is that the rising market price will be a confirmation of the market direction (upward momentum) before buying the security at market price.

 

• Stop Limit Order: Here, you specify the number of the security you want to buy and also state a stop level that must be reached before a limit order can be triggered to purchase the security at or below a specified maximum price. The stop level is above the current market price of the security. When the price reaches the stop level, a limit order is triggered to buy the security at a certain limit price. The idea is that the rising market price will be a confirmation of the market direction (upward momentum) before buying the security at a certain limit price.

Types of sell orders

• Market order: With this order type, you specify how much of the security you want to sell and when they are to be sold. The order is executed at the best market price at the time of sale.

 

• Limit order: You specify how much of the security you want to sell and what lowest price you are willing to sell for. The order is executed when the market trades at or about your limit level. A limit order can be linked to the opening or closing price, but it’s often set to be valid for the entire trading day.

 

• Stop Market Order: You specify how much of the security you want to sell and the stop level that must be reached before a market order to sell the security is triggered. The stop level is below the current market price of the security — when the price falls to the stop level, a market order is issued to sell the security at the market price. The idea is that the falling market price will be a confirmation of the market direction (downward momentum) before you decide to sell the security at market price.

 

• Stop Limit Order: You specify how much of the security you want to sell and the stop level that must be reached before a limit order is triggered to sell the security. The stop level is below the current market price of the security; when the price falls to the stop level is reached, a limit order is issued to sell the security at a certain limit price. The idea is that the falling market price will be a confirmation of the market direction (downward momentum) before you decide to sell the security at a certain limit price.

 

• Stop loss order: This is a special kind of stop order that is used to close an already existing position. You specify how much of the security you want to sell if the price falls to a predetermined stop-loss level, which (for an already existing buy position) is below the current market price. This is a way to limit the size of a loss in a trade. The stop loss level is usually set in relation to the purchase price — for example, 10% below the purchase price. So, the loss on the individual trade is limited to a maximum of that 10%.