How to leverage the power of ordering for efficient investing
April 21 2022 - Team Stockal
An order – essentially a buy or sell instruction – is the fundamental trading unit of a securities market. An online order simply consists of instructions to an investing platform like Stockal to purchase or sell a security on your behalf.
However, before you can start buying and selling stocks, it could help to understand the different types of orders you have at your disposal.
The importance of orders comes to the forefront, especially when one is trading stocks that are highly volatile or trading in a fast-moving market, where prompt action can be the difference-maker between a winning and a losing position. Therefore, understanding trade orders beyond the traditional “buy” and “sell” is very important.
Read on to know more about the essential kinds of stock orders available on Stockal, and how they can better your investing strategy.
Bid Price or Ask Price
The term “bid” refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. The term “ask” refers to the lowest price at which a seller will sell the stock.
The bid price will almost always be lower than the ask or “offer,” price.
In simple terms, if you are buying a stock, you pay the ask price. If you sell a stock, you receive the bid price.
The difference between the two prices is called the bid-ask spread.
Last Trade Price
Last Traded Price is the price at which the last trade happens between a buyer and seller of a particular stock.
Types of orders
The four key types of orders that every investor should know are market order, limit order, stop order and market-if-touched order.
1. Market Orders
A market order is a popular tool among investors who want to buy /sell stocks or ETFs immediately during the market hours. They are submitted immediately and carry the highest priority. Provided there is sufficient liquidity to fulfil the order, customers can expect very fast execution.
Current market prices are not constant and subject to change. This is because in fast-moving and volatile markets, the bid or ask the customer sees when placing the trade is an indicative price only, and the actual executed price may differ.
Market Hours: 9:30AM EDT – 4:00 PM EDT
2. Limit Orders
Limit Order as the name suggests is where you define a price of the stock to buy or sell. The transaction (buy/sell) gets executed only when the price of the stock reaches the price defined by you. They won’t execute at all if the prices don’t reach the limit set. In other words, a limit order simply sets the maximum or minimum price at which you are willing to buy or sell a stock. In effect, this means that the order will not be filled if the price does not reach this level.
Buy orders are created with a price below the current ask, and sell orders are created with a price above the current bid.
For example, if you wanted to buy a stock on the Stockal at $10, you could simply enter a limit order for this amount. This means that you would only pay $10 or less for that particular stock. Similarly, if you want to sell a stock at $10, the execution will happen when the stock touches a minimum of $10. This means you can receive $10 or more under limit order.
To execute the limit order, the order for the quantity and specified price is sent to the exchange or the market maker to be paired with a buyer or seller also willing to transact at that price.
Limit orders will expire after 90 days from the date of creation if not executed.
It’s important to note that because limit orders need to rest in an order book at a market maker, they accept whole-share quantities only i.e. Fractional quantities are not accepted
3. Stop Orders
A stop-market order is a standing order to sell a stock or ETF if the price reaches a certain level. It is meant to protect you from loss if the market moves too far in the wrong direction. These can be orders either to buy or sell, but no trade takes place unless the price hits that trigger. When the price is reached, the stop order becomes a market order and is executed at the next best price.
A stop order, also referred to as a stop-loss order
A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order in an attempt to limit a loss or to protect a profit on a stock that they have sold short. So can be used to establish a new long position.
A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order in an attempt to limit a loss or to protect a profit on a stock that they own.
Three important things to note about Stop Orders:
- When Stop Orders are placed, a check is done to ensure the customer has the shares to sell.
- Once a Stop Order is submitted and accepted, it is the customer’s responsibility to maintain and update the Sell Stop Order to reflect any changes in the underlying position.
When will order be triggered to be executed?
- Buy stop Order: If last Trade price >= trigger price
- Sell stop Order: If last Trade price <= trigger price
So, if you will like trigger the buy order when the price is going up or sell order when price are going down and limit your loss, use STOP order.
4. Market-if-touched Orders
Market-if-touched (MIT) orders are a type of order that will be executed when the price set by the investor is touched, even if it does so only briefly. The investor sets a price, and if that price is hit, the MIT order will become a market order and will be executed at the next best price.
Market-if-touched (MIT) orders are similar to limit orders, except they don’t guarantee a price. This helps them execute more quickly, while still allowing investors to set target prices rather than buying at the current market price. In other words, a MIT order allows you to purchase or sell a stock or ETF at a desired value without actively monitoring the market.
Like limit orders, these order types require both a quantity (or dollar amount) and a price. They may be considered an alternative to limit orders when fractional orders are desired (keeping in mind the lack of guaranteed price).
When will order be triggered to be executed?
- Buy market-if-touched: If ask <= trigger price
- Sell market-if-touched: If bid >= trigger price
So, if you will like trigger the buy order when the price is going down or sell order when price are going up and limit your loss, use market-if-touched order.
At Stockal, we are always looking out to add features to our platform to improve it and give you an exchange-like investing experience. Do make an effort to understand and leverage these different types of orders in the stock market so that you can benefit from the extended trading hours now available to you. Choosing the right order type can help you maximise your profits in the stock market.