You don’t have to be a math whiz – or a millionaire – to invest in the stock market.
In fact, the sooner you get comfortable buying and selling stock (and start investing in some solid companies), the better you can leverage stocks in your portfolio as your net worth grows.
Here’s an explanation of the three most common types of stock market orders that new investors should understand.
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This is highly simplified, but is essentially all the bare minimum somebody needs to know to log onto an online broker and start investing. That said, we recommend new investors take a lot of time learning about investing and starting with very simple investing strategy focusing on low-cost index funds before diving into trading individual stocks.
The most common way to buy or sell stock, a market order instructs your broker to take whatever price available to buy or sell X shares of stock.
Market orders are easy for brokers to execute, so they carry the lowest commissions of any trade.
Let’s say you want to buy 100 shares of Yahoo! (YHOO) on any given day, and the price happens to be $16. To place a market order you could log onto your online broker or call your broker and place a “market order for 100 shares of Yahoo.”
Since there is always a delay of at least a few seconds between the time you place your order and the time the order is executed, the actual share price for Yahoo! may have gone up or down. It could have jumped to $16.25, or it could have slid to $15.75. Therefore, you won’t know your final price for the shares, before commissions, until the order is executed. This can be risky if the stock swings wildly between the time you place your order and the time it is filled.
There will be times when you won’t want to pay more than a certain price for a certain stock, or you will not want to sell a stock for less than a certain price. In these cases you will want to place a limit order.
A limit order lets you set a minimum or maximum price for a stock but, unlike a market order, you will have no guarantee the order will actually be executed.
Take the Yahoo! stock example. If the price is currently $16.25, but you don’t want to pay more than $16 per share, you would place a limit order for $16 or less. If the stock falls to or below $16, your order is executed and you own the stock at that price. If the stock keeps climbing and never dips below $16, your order is never executed.
One risk of placing limit orders is the potential for a dramatic short-term swing in stock price. If you place a limit order to buy a stock at $16 but disappointing news hits about the company and the stock plummets to $14 in one day, your order is still placed at $16, meaning you are automatically out $2 a share.
Stop Order and Stop Limit Orders
Most new investors should be able to make due using only market and limit orders. For the slightly more speculative investor, stop orders and stop limit orders are often used as “stop loss” trades. These orders are most often use to guarantee profits (or stop continued losses) on a particular stock.
An investor can place a stop order to become a market order when a predetermined price is reached. For example, sell 100 shares of Yahoo! at $20. When Yahoo! reaches $20 a share, the stop order is converted to a market order, meaning the order is guaranteed to be executed. Since the order is a market order, however, the exact price may not be $20 – it may be higher or lower, but the fact that the stock reached $20 triggered the trade.
A stop limit order, on the other hand, automatically converts to a limit order when the target stock price is reached, meaning the order may or not be executed depending on the price movement of the stock. If the stop limit order is for $20, the order is triggered at $20, but if the price continues to climb (or falls back below $20), the limit order may not be placed.