In part one we covered some of the jargon and stock market speak that you need to know to master the markets. And now that we have got to grips with the basics, it’s time to understand how the different orders used by traders enable them to stay on top of the market whether at, or away from, the computer.
Most people will be familiar with the buy and sell orders that investors make but this only scratches the surface of the orders investors can give. To truly get to grips with the stock market and profit like an expert you need to understand the different types of trading orders investors use.
Let’s start with one of the most basic moves a trader can make – a market order. A market order comes in the form of a ‘buy at market’ or ‘sell at market’ order. This means that the investor would like to make an immediate trade. By setting up a market order you are telling your broker to buy, or sell, a particular stock immediately, at whichever price it is currently trading at.
In addition to a market order, investors will set up ‘Stop’ and ‘Limit’ orders. These orders are set to tell your broker to buy or sell a stock on your behalf when it reaches a certain value. For example, you may set up a stop order that tells your broker to “Buy X amount of stock Y if it reaches a price of Z” or a limit order that tells your broker to take profits if a stock reaches a certain price.
Although stop and limit orders may sound like a failsafe for investors, they do not always work as planned in abnormal market conditions. For example, if a stock is trading at £50 and you have a limit order set at £45 you would expect to sell automatically at £45. Unfortunately, this is not always the case. If tomorrow the market opens at £40, then your limit will be hit at £40 and not at the £45 you placed it at. Although this may prove inconvenient for investors, by regularly reviewing your orders you will keep on top of your investments and ensure that you do not lose out no matter the state of the market.
In addition to market, stop, and limit orders, you may have heard investors refer to holding long or short positions. These terms are relatively easy to understand. Entering a market long means that you buy into a stock with the expectancy that its price will go up. If you go short, you expect that the price of the stock will fall.
Now based on whether you currently hold a stock or are thinking of buying in to one you will need to use market, stop and limit orders in different ways. Imagine that you already hold a long position (you expect it to go up) on a stock trading at £80 and you expect that the stock will rise to £82 shortly. You will want to act when the stock reaches £82 to ensure you take away a profit, but you will also want to act if it doesn’t go as expected and falls below £78 to minimise your losses. When holding a stock of this kind you want to make sure that you have set up your orders in the following ways:
Market order: you may want to place a market order to tell the broker to buy or sell a particular stock immediately, at whichever price its current trade price is.
Limit order: To guarantee that you take your profits when the stock rises to £82 you can place a limit order. This will ensure that the position is automatically closed when the stock price hits your £82 target.
Stop order: To make sure that you do not sell the stock for less than £78, you need to place a stop order. This means that your broker will automatically close the position if the stock hits this value.
If you don’t yet own the long stock but would like to buy it, the way in which you use the orders will differ. Below is how to use the orders when you don’t yet own the stock:
Market order: If you see that a stock is at a value that you would like to buy it for, you should place a market order to ensure that you get it at its current trade price.
Limit order: When you are buying a stock, you want to buy it for the lowest possible price. So you might set your limit order to £75 so that you save yourself some money by only buying when it falls to this lower price.
Stop order: A stop order is usually in place so that you don’t lose out. But if you don’t already hold the stock, you can use a stop order to ensure that you don’t pay more for a stock than you would like to. You may place a stop order so that if a stock keeps going up and you don’t want to pay more than £84 pounds for it, you can ensure you won’t miss it at this set price.
Once you’ve got your head around this terminology, the best way to get to grips with orders is to follow an expert trader to see how they use them in practice. All the best traders build strict orders into their strategy that they stick to religiously. By learning how an expert enters and exits different strategies you will have all the tools you need to profit like one too!
Gaspar d’Orey is CEO and co-founder Zercatto