Understanding Different Buy and Sell Orders When Managing Stocks
Everyone knows you can buy and sell shares of stock on the stock market. Some investors, however, don’t realize the nuances of the different buy and sell orders — market orders, time orders, limit orders, stop-loss orders, and so on. By understanding these different types of orders and using them correctly, you can maximize your dividend profits and minimize your potential losses. This knowledge is especially helpful if you’re working with a discount broker, who doesn’t provide the same guidance as a full-service broker.
The market order is the simplest, most straightforward way to buy or sell stock. You place an order to buy or sell shares, and it gets filled as quickly as possible at the best possible price. Market orders carry no time or price limitations. Stocks with high trading volume process the trade immediately. Stocks with a low trading volume may take longer to trade and experience a wide bid-ask spread — the difference between the seller’s asking price and the buyer’s bid amount.
Limit orders are the flip side of market orders. With a market order, you want the trade to go through immediately and aren’t price sensitive. With a limit order, you want a specific price for a purchase or sale regardless of how long getting that price takes. You’re willing to wait to get what you want — just remember that you may wait forever if the stock never reaches your limit. Limit orders also allow you to trade without having to pay close attention to the market.
You can also use a limit order on the sell side. If you bought shares at $20 and the stock is moving higher, you can put a limit order in to sell the shares at $25.
Limit orders (among other kinds of trades) often don’t go through on the day you place them, so you need to place a time order with a limit order.
Two kinds of time orders determine how long an order (such as a limit order — see the preceding section) remains in effect:
Day orders: Day orders expire at the end of the trading day on which you place them. If the stock you want is at $42 and you place a day order to buy shares at $40, the order expires unfilled if the stock doesn’t fall to $40 during the trading session.
Good-till-canceled: Just like it sounds, the good-till-canceled order stays in effect until one of two things happen: Either the stock hits the price you want and the trade goes through, or you call your broker and actively cancel the order (although note that some brokers put a 30 or 60 day limit on good-till-canceled orders).
Stop-loss orders work similarly to limit orders but with a different strategy. With a limit order, you know how much profit you want to earn, so you place a limit to sell your shares at the specific price that locks in that profit. With the stop-loss order, your stock is rising and you want to let it ride to see how far the stock goes while protecting the capital gains already in the share price if the shares fall.
Trailing stop orders
Trailing stops are a technique that uses the stop-loss orders from the preceding section to preserve your dividend stock’s profits. Trailing stops are stop-loss orders that trail the movement of the stock’s price. As the stock moves higher, you keep moving the stop-loss order higher to protect more profits.
Brokers rarely institute trailing stops, so you can’t just set it and forget it. You have to actively manage your trailing stops.
Wall Street calls buyers long on stocks. You expect your stock to move higher, and you have unlimited profit potential. However, you can also profit from a falling market or declines in individual stocks. Selling a stock first with the expectation of buying it back later at a lower price is known as selling short or shorting a stock. This strategy is one of the main ways to make money in a bear market. Instead of buying low and selling high, you first sell high with the hope of later buying low.