There are three types of orders that you can place when you are trading stocks: market orders, limit orders and stop orders. Each one of these has a specific purpose, and it is important to understand the differences between them so that you can make the most informed decisions about your investments. Let’s have a look at each type of order to explain what its function is in the stock market.
What is a market order
When you are buying or selling a security at the best available price, you are placing a market order.
This order is a basic type of trade and are generally executed quickly and at a price close to the quoted bid or ask price.
However, because market orders are filled at the best available price, they may not always fill at the price you expect.
For this reason, traders who want more control over the price they pay (or receive) may choose to place limit orders instead.
While market orders provide convenience and speed, limit orders offer greater control and may result in better prices.
What is a limit order
When you are buying or selling a security at a specified price or better, you are placing a limit order.
- A “buy limit order” is placed at the limit price or lower.
- A “sell limit order” is placed at the limit price or higher.
Limit orders may be used when an investor wants to buy or sell a security at a specific price and is willing to wait for the order to fill. An investor may use a limit order if they do not want to miss an opportunity to buy or sell a security at their desired price, but they are also willing to wait for the right opportunity.
What is a stop order
In investing, a stop order is an order to buy or sell a security when it reaches a specific price, known as the stop price. A stop order becomes a market order when the stop price is reached.
- A “buy stop order” is placed at a stop price above the current market price
- A “sell stop order” is placed at a stop price below the current market price.
Stop orders are used by traders to limit losses or protect profits. When used to limit losses, the stop price is set below the current market price; when used to protect profits, it is set above the current market price. In both cases, the investor believes that the stock will continue to rise (in the case of a buy stop order) or fall (in the case of a sell stop order) once it hits the stop price.
When trading, it is important to know when to use each type of order in order to get the best possible price.
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Disclaimer: these articles are for educational purposes only. Market analysis, prices, news, trade ideas, or any other information within this site or the chatroom is not investment advice.