Prepare for Your First Energy Investment
When you’re ready to make your first energy investment, you need to get familiar with some important terms. A stock quote is made up of the name of the company or fund, the ticker symbol, open price, bid and ask prices, current price, and volume. This table shows all this information for ExxonMobil at a random moment in time.
|Name||Ticker||Open Price||Bid Price||Ask Price||Current Price||Volume|
In this example, ExxonMobil (NYSE: XOM) started trading at $88.50 for the day. At the moment in time you look at that quote, buyers are willing to pay $88.31 per share (the bid), sellers are willing to accept $88.32 (the ask), the stock is currently priced at $88.31, and over 2.4 million shares have already traded hands.
You then decide how many shares you want to purchase. Make sure you have enough money in the account to cover the total purchase price plus any fees. In this example, if you have $1,000 to invest, you can buy 11 shares of Exxon for a total of $971.52 (11 × $88.32 = $971.52), plus any per-trade commission the broker charges you.
Market and limit orders
After you determine how many shares you want to buy, you need to decide what type of order to place. When making a purchase, your options include a market order and a limit order.
A market order guarantees your trade will be executed but doesn’t guarantee a price. It executes the trade at whatever the current ask price is. If you set a market order in the Exxon example, your shares would be purchased at $88.32. If the ask fluctuates while you’re placing an order, your trade could be executed at a higher or lower price than you see in the quote.
A limit order guarantees a certain price but doesn’t guarantee that your order will be completed. If you set a buy limit order for Exxon at $88.25, it won’t be executed until the ask reaches that level.
This is a much safer way to place trades because the trade isn’t executed until the security reaches the exact price you’re willing to pay. If the security doesn’t reach the specified price, the trade isn’t completed.
With a limit order, you may also be able to select options like all or none (AON), good until canceled, or good until date. All or none means you only want the trade to execute if you can get all the shares you’ve requested at that price.
If you want 11 shares at $88.25, and only 5 become available at that price, the trade won’t execute if you’ve selected all or none. Good until canceled means the order remains open until you cancel it, and good until date means the order remains open until the date you specify.
This figure shows screen shots of buy market and limit orders for Exxon, as described in this example.
Sell orders work in much the same way as buy orders. A market sell order executes at the current bid price. A limit sell order doesn’t execute until the stock hits the price you specify. The strategy is simply reversed. You generally want to get the lowest price when buying and the highest price when selling.
There are a few more advanced options beyond market and limit orders. Able to be executed on both the buy and sell side, these include
Stop-loss order, also known as stop order or stop-market order
A stop-loss is an order to buy or sell a security when the price rises above or falls below a specified stop price. After that price is reached, the stop order becomes a market order. A stop-limit order is the same thing, except that after the stop price is reached, the order becomes a limit order.
You use stop orders primarily to limit downside risk without having to constantly monitor your portfolio. They’re a free insurance policy. For example, if you buy Exxon at $88.50 and want to limit downside risk to 5 percent, you’d set a stop-loss order for $84.07 (88.50 × .05 = 4.43; 88.50 – 4.43 = 84.07), and your position would be sold at market if the stock reaches that price.
For even more security, you’d set a stop-limit order with a limit price you determine, so that if the stock is falling extremely fast, your shares aren’t sold at market well below the stop price.
This concept can be hard to visualize, so this figure shows images of a stop-loss and stop-limit order placed for Exxon.
Conversely, you can use stop-loss and stop-limit buy orders to buy a stock only if it rises to a certain price. Though the objective is usually to buy as low as possible, some traders and technical analysts prefer to wait until a security is in a clear uptrend before buying. These types of orders help execute that strategy without staying glued to your computer.
A trailing-stop is a stop-loss order set at a percentage level or dollar amount below market price. It is “trailing” because the stop price is adjusted as the stock price fluctuates, allowing you to let profits run while minimizing losses. You can place a trailing-stop market order or a trailing-stop limit order.
For example, if you buy Exxon at $88.50 and want to lock in future profits if the stock ever falls 5 percent, you’d enter a trailing-stop sell order at $84.07. Then, if the price moves to $93.50, your trailing-stop would automatically rise to $90.82.
If the price continues rising to $98.50, your trailing-stop would climb to $93.57. Then, if the price begins to fall, your trailing-stop stays at $93.57, and if the stock price reaches that level, the trailing-stop would trigger a sell, automatically protecting your profits. The trailing-stop only moves in the direction of the trade.
Don’t set a trailing-stop that’s too close to the market price because the market always fluctuates, and you don’t want to sell prematurely.