How to Trade in Stocks Online
Trading in stocks online is not like shopping at your local major retailer, where prices are set. Because investments are priced in real time through active bidding between buyers and sellers, there are techniques to buying and selling. When dealing with investments, you have five main ways to buy or sell them online:
Market orders: This is the most common type of order. You instruct your broker to sell your shares at the best price or to buy shares at the current price. Because these orders are executed almost immediately and are straightforward, they typically have the lowest commissions.
Limit orders: With a limit order, you instruct your online broker the price you’re willing to take if you’re selling stocks and the price you’re willing to pay if you’re buying. The order will execute only if your price is reached.
Imagine you own 100 shares of ABC Company, which are trading for $50 a share. The stock has been on a tear, but you think it is destined to fall to $30. You could sell the stock outright with a market order, but you don’t want to miss out on any gains in case you’re wrong. A limit order would let you instruct your broker to sell the stock if it fell to $45 a share.
Limit orders are filled only at the price you set. If the stock falls further than the price you set, the broker might be able to sell only some of the shares, or none, at the price you set.
Stop market orders: Similar to limit orders, stop market orders let you set a price you want to buy or sell shares at. When a stock hits the price you designated, the order converts into a market order and executes immediately.
Imagine that you have 100 shares of ABC Company, which are trading for $50 a share. But this time, you enter a stop market order for $45. And again, you wake up to find the stock plunged instantly to $25. This time, though, all your stock would have been sold. But, your online broker will sell the shares at whatever the price was at the moment your order converted to a market order, which in this case could have been $25.
Stop limit orders: Stop limit orders are customizable. First, you can set the activation price. When that price is hit, the order turns into a limit order with the limit price you’ve set.
Okay, ABC Company is trading for $50 a share when you enter a stop limit order with an activation price of $45 and a limit price of $35. It would work like this: Again, you wake up to find that the stock plunged instantly to $25. This time, your broker would turn your order into a limit order after it fell below $45.
When the stock fell to $35, the broker would try to fill orders at that price if possible. But unlike with the stop market order, you would not dump the shares when they fell as low as $25.
Trailing stops: Regular limit orders are either executed or they expire. Trailing stop orders get around this problem by letting you tell your broker to sell a stock if it falls by a certain number of points or a percentage.
If you’re buying and selling individual stocks, trailing stops can be a good idea. Even before you buy a stock, you should have an idea of how far you’ll let it fall before you cut your losses. Some investment professionals suggest never letting a stock fall more than 10 percent below the price you paid. If this sounds like a good idea to you, a trailing stop could work for you.
Some brokers charge extra for limit orders, so check the commission fees before you start trading. And some brokers, such as Buyandhold.com, don’t offer limit orders.
When you enter an order for a stock, you have a few other levers you can pull, including
Designating lots: Many people buy the same stock many times. Each time you buy, that bundle of stock is called a lot. When you sell, your broker will assume you’d like to sell the lot that you’ve held for the longest time for recordkeeping purposes. If, for tax reasons, you’d like to sell a specific lot that’s not the oldest, you can tell your broker which lot you’d like to sell.
Setting time frames: You can enter an order for a stock that is active only for the day you place the trade. If it’s not filled, the order expires. You can also enter orders and let them stay active until you cancel them.
Placing rules: When you issue an “all or none” restriction on your trade, your broker must sell or buy all the shares in your order, or sell or buy none of them. For instance, if you want to sell 1,000 shares of a stock, but there’s not adequate demand for all 1,000 shares, the order is cancelled at the end of the trading day.