Market Beat: Market and limit orders
If you wish to buy or sell a stock or an exchange traded fund, there are several different types of orders that can be used to help achieve your goals. Whether you place your orders through a broker or are an online do-it-yourselfer, it helps to thoroughly understand how the various orders work.
The most basic type of order that is one of the most commonly placed is called a market order. If you use a market order your transaction, whether it’s a buy or a sell will be filled immediately at the best available price. If you’re a buyer, you’ll pay what is known as the ask or offer price and if you’re selling, you’ll receive the bid price. The difference between the bid and the ask is called the spread. Highly liquid stocks and ETFs will have a very tight spread, maybe one penny. Issues that are thinly traded can have wide spreads. If the spread is wide you may want to use another type of order known as a limit order.
With a limit order, you specify the amount that you are willing to accept for the buy or the sell. Limit orders may not fill right away, but they won’t fill at all unless the underlying hits your target price. Limit orders can be good management tools, for example if you were to buy XYZ stock at $50 per share and were willing to sell it at $60 per share, you could place an open order to sell all or some of the shares anytime XYZ hit your $60 price target. Limit orders can also be used to target a lower entry price than the current market price. If XYZ stock was trading at $50 per share and you were willing to buy more if it dipped to $40 per share, you could place an open order to buy at $40 and that order will not get filled unless XYZ hits that level.
The time your order is good for can also be specified when it is placed. Orders can be good for one day or placed as GTC, which stands for good until canceled. Most brokers today also allow for customized time in force periods, so you can place an order and then specify the date that it is to be canceled if it does not get filled. There are other order types also, that I’ll discuss later.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.