Looking at the Different Types of Stock Orders
When dealing with stock, after having decided if you want to buy or sell them you may have encountered a variety of terms that must have stopped you dead on your tracks. Every stock trading platform asks you what kind of ‘order’ you would like to place. If you are not quite sure about the kinds of options you have to contend with at that point,
here is a comprehensive break-down of the most common types of market orders,
most of which you’ll find in your stock trading app. This post should help you gain a better understanding of what to do with the stocks you have decided to buy or sell.
Introduction
As you may have already discovered if you find yourself reading this article,
stock trading is not as simple as the kind of trade you have in your local supermarket,
where you exchange one commodity for another (or currency). One has to decide the type of buy or sell order they want to place,
which in turn dictate the price at which the transaction should take place and the timing of the transaction. You may want a transaction to take place as soon as a seller of a given number of shares at a particular price becomes available. You can set up the whole thing online using these options.
How stock prices are determined
The setting up part is important here, especially the understanding of it. How it works is through a mechanism where buyers and sellers settle on a price of a stock. The ask price is that which the people who own the stock are willing to sell it for. Similarly, the bid price is the price buyersare willing to pay for a given stock. Unwillingness on either ends to pay what is being asked for by the owner and what the buyer can pay will mean that the stock isn’t sold. Understanding the concept of the ask and the bid prices helps us gauge what a spread is. The spread is the gap, or the difference between ask prices and bid prices. The compromise within the spread is where the price of a stock is determined.
The stock prices fluctuate through this compromise,
wherein a greater compromise on the buyer’s part will mean that the price of a stock goes up; while a scenario where the seller agrees to settle for a lower price means that the price goes down.
Please note that the mechanism of the fluctuation of stock prices is entirely different from the valuation of stocks that we have discussed earlier. In this article, we are discussing the actual process of how stock prices change,
whereas evaluating stocks simply involves discovering which stocks are undervalued or overvalued in relation to their existing prices,
and trying to determine the best ones to invest in. Valuation of stocks accounts for a lot of factors such as the company’s overall health and in which direction the company is likely to be headed in.
The various types of market orders that we are about to discuss account for the mechanism where the ask price,
bid price and the spread are involved, and how the price of the stock is determined. So without any further ado, let us take a look at the different types
Market orders
This type of an order is where the investor simply agrees to pay what is being asked for by the seller. If the person who sets the order quotes the price, and it becomes equal to the ask price as there is no ‘negotiating’ at play here. In a similar way,
when the order is being set by the seller, the price is equal to the bid price. In either case, because there is no spread here, the transaction happens almost instantly.
Stop and limit orders
Stop and limit orders are useful in that they are employed to manage when a transaction takes place,
specifically at which price. When an investor is looking to buy shares but not until when the share price drops beneath a certain point,
he can set an order that does it for them. In the same way,
when an investor is looking to sell a certain number of shares at a point where he thinks the price would be high enough for them to make a profit,
they can set the order allowing them to sell automatically.
A stop order is one that is intended to sell shares after their pricesfall below a certain point,
limiting the amount of losses incurred had the stop order not been placed.
Limit orders are those meant tobuy shares once their price falls to a certain point,
where the investor believes they might rebound for her to make a profit later on. If they want to sell some shares after they surpass a certain price, they might be thinking in terms of making and keeping the profit,
perhaps having foreseen a price drop in the future.
Pegged orders
In order to understand Pegged orders, let us simply discuss how it is similar and different to a stop and limit order.
They are the same in that the transaction is not triggered until a predetermined price is reached. The difference lies in the fact that, as the name suggests, the price is pegged with some other variable index. If the variable reaches a particular point, the order is set.
Time-contingent orders
There are chances that an order does not get fulfilled for a long time as the trigger price is not reached. If time is an important factor before setting an order,
a predetermined period of time can be set-up for the order to be entered into the market. Other orders which are cancelled by the end of a trading day can also be termed as time-contingent orders.
Wrapping Up
We have looked at the various types of market orders when dealing with stocks. A clear understanding of them can go a long way in making the most out of your decision to buy or sell stocks, while putting your mind at ease about your instincts. We at Dailytopstocks certainly hope so!
