Market Beat: Types of equity orders
Advances in technology have made online discount brokerages very popular and have dramatically lowered costs for investors. Before the internet revolution if you wanted to place a trade, you’d have to call your full-service broker, who would write up an order ticket and run it to the wire operator at the firm who would send the order via satellite. Commissions per trade were typically about $100. In the early days of my career, we had to execute trades this way. Today many brokers offer the same service for around $5 over very efficient internet-based platforms.
If you’re new to investing and want to do it yourself online, you should educate yourself as much as possible. There are more than two types of orders, it’s not just buy or sell. The stock or exchange traded fund will have a few different prices posted. One is the last trade, one is the bid price, and another is known as the ask or offer price. If you enter what’s known as a market order, the trade will execute right away at the current market price. If you’re a buyer, you’ll pay the ask price and if you’re a seller you’ll receive the bid price.
The difference between the bid and the ask is known as the spread. The spread will be as tight as one penny for highly liquid issues but can be quite wide for thinly traded ones. If you’re concerned about the spread or just want to buy or sell at a certain price, you can place what’s known as a limit order. With a limit order, you specify, your purchase or sell price and the trade will only execute if the underlying hits that price.
Stop orders can be used as one way of limiting losses and managing risk. For example, if you buy XYZ stock at $50 per share and decide that you’ll sell if it drops by 10%, you can place a stop order at $45 per share. If XYZ hits $45, the order will become a market order and execute at the next price. A disadvantage to the stop order is that it does not guarantee the price you’ll receive. The stock could crash through the stop and the trade could execute much lower. An order known as a stop limit can be used and we’ll discuss those and other types in a future column.
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.