Types of Stock Trading Orders

There are many different types of orders you can make when you enter your stock order into your online broker's website.  The differences are crucial, and depending on the stock you are trading, it may end up costing a lot if you aren't careful.

To understand what type of order is best, you must first understand the "bid price" (the price at which traders who want to buy the stock are willing to buy it at) and the "ask price" (the price at which traders who want to sell the stock are willing to sell it at). The difference in the "bid" and "ask" is known as the "bid/ask spread".  For large or mid-sized companies that have hundreds of millions or billions of shares held by the public, the trading volume (number of shares traded daily) is so high that the spread is usually just a penny.

For smaller companies, that spread could be anywhere from two cents all the way up to thirty cents or more.  The fewer shares traded, the harder it is to match up buyers and sellers at the same price.  For companies that only trade a few thousand shares each day, that spread may not only be large, it may increase every time somebody tries to execute a trade as buyers and sellers scramble to maximize their profit.

A limit order buys or sells a stock at a price you specify, or better.  A buy limit order is fulfilled at the limit price or lower while at the limit price or higher, a sell limit order takes place.  But here's the kicker: there is no guarantee that a limit order will execute. It only gets executed if the market price of the stock reaches the limit price.  The advantage is that you won't pay more, or sell for less, than your chosen price for a stock.  This is perfect for smaller stocks with wide spreads.   For large stocks where the spread is only a penny, it makes little sense.

Use Stop-Loss Orders when the market is volatile

If you buy a stock when the market is tumbling, a stop-loss will protect you if the tumble become a full-on crash or bear market.

I recommend: Set your stop-loss 7% below the price you bought at.  That's a reasonable loss to absorb while not getting stopped out too early.

Orders for Small Companies

Stocks that don't trade many shares can have their price move a lot in just one trade.  Use limit orders whenever possible.

I recommend:  Don't put in orders of more than 500 shares at a time for stocks with a large spread.  It won't get filled in its entirety.