Different types of orders can be used to trade stocks, depending on your investing style. Ever wondered what the difference is between a limit order and a market order? If you are interested in buying and selling your own stocks, it is worthwhile to understand the order types and when they are appropriate.
As the most common type of order, market orders are used when you require an immediate order execution. You state the number of contracts you want to trade without specifying the price. Your order will be filled at the best possible price in the market, and cannot be cancelled once the order is placed.
Limit orders allow you to trade at a specified price, giving you the advantage of knowing the lowest price at which your order will be filled. However, there is a possibility that the market will not trade at your price.
A buy limit order is used when you want to make sure that you pay no more than a specified price when you buy any option. In most cases, the order price is less than the current market price. When buying an option, a better price would be lower than the stated price.
A sell limit is used when you want to set a minimum price for your order. In most cases, the order price is higher than that of the current market. When selling an option, a better price would be higher than the stated price. These order types are useful when the market is experiencing a substantial volatility.
A stop order uses a specified price to trade options, converting it into a market order when the set price is reached.
Buy stop orders allows you to profit from the strength exhibited by the market. You specify a price that is higher than the current option price.
Sell stop orders are usually used to protect an existing position from more loss. It dictates that the price you want to trade at is below the current price.
Good-Till-Canceled Orders or Open Orders are valid until the particular option expires. You can designate a Limit Order or Stop Order as a GTC to prevent is from expiring until it is filled or canceled. With other order types, you will need to re-enter the order every morning. With GTC, you can avoid that hassle and rest assured that the order will remain valid until it is filled, canceled by you, or it expires.