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TRADER'S NOTEBOOK


The User's Guide To Buy And Sell Orders

12/14/05 11:34:08 AM PST
by John Devcic

Expand your trading expertise with this handy guide to orders and how to use them.

Whatever your experience regarding market orders, everyone knows "buy" and "sell." Like everything else when it comes to trading, there are variations on these two tried-and-true types of orders. How many of you actually know what the different order types are, let alone how and when to use them? That's our aim today, to list and explain the types of orders available to investors. No more will you look at the order itself as an afterthought.

Before we begin, keep in mind that orders are considered day orders unless otherwise noted. That statement probably does not mean much to you right now, but it will as you read on.

TYPES OF ORDERS
Market orders:
Here, the customer knows the order will be filled but does not know the price at which it will be executed. This is a general order, used when the investor wants to get in or out of a position quickly. A market order is executed at the best available price that the broker can get. If your intention is to initiate a position or close a position at a specified price, a market order isn't what you need. The major advantage to a market order is that a position can be opened or closed quickly, as market orders take precedence over other kinds of orders. The major disadvantage in using this type of an order is obviously the price. In a quickly moving market, the price can rapidly change, which in the end can cost you more than you anticipated. Market orders should be used when you have to open or close a position quickly.

Limit Order: This type of order is used when you want to be assured of selling or buying at a specific price. That is the only assurance this type of order can give you, because this order may never be filled or partially filled.

There are certain steps to a limit order. The first step is placing the actual order where you would specify the price and amount. Next, the order will probably not be filled right away, so it will be placed into a specialist's book and filled when the price is touched. Of course, there is one other variable involved, in that your limit order will be prioritized; it will be executed after all the other market orders are filled and any other orders that were received before yours.

An example of a market order would be to buy 200 shares of ABC stock at $45. Say the price is $60 right now; your order will remain dormant until the price falls to $45. Say it does fall to $45; your order will be filled to the best of your broker's ability. There is a chance, however, that instead of 200 shares, you may only receive 100.

The advantage of a limit order is that you specify the price and amount of shares. There are two major disadvantages to a limit order. One, you don't know if your order will ever be executed. Two, even if your order is executed, you may not receive all of the shares you wanted.

Stop Order: Either buy or sell can be used. When you use this type of order, you can specify a price just like with the limit order. Unlike the limit order, a stop order immediately becomes a market order once the price is touched. For example, if you place a buy-stop order at $50 and the current market price is $53, if the price touches $50 or $49, your order becomes a market order and will be treated as such. There is no guarantee your order will be filled at the price you placed the stop; instead, it could be higher or lower. The advantage is that you will have your order filled. The disadvantage is that in a stop order, you will not get the price you wanted. Clearly, you would use this order to initiate or close a position where price is not as important as being in or out of a position.

Stop-Limit Order: This is a stop order that becomes a limit order once the stop price is touched. This order is used to place a limit order, but you want to wait until a certain price is touched. Once touched, your stop-limit order is now a regular limit order. The benefit of a stop-limit order is that you can control the price at which the trade will get executed. Say you are interested in buying shares of XYZ and it is currently selling at $30. You decide to place a stop-limit at $35. If the price moves above $35, the stop order becomes active, in which case it becomes a limit order, so your order can only be filled at $35 or less.

Day Order: This order is only good for the duration of the day. If the order is not executed by the market's close, it is immediately canceled. Unless you give your broker specific instructions to the contrary, orders to buy or sell a stock are day orders.

Day orders placed during after-hours trading can only be executed during that after-hours session. If your order is not executed during a trading session, you will have to place a new order during the next trading session.

Good Till Cancel (GTC)/Open Order: This type of order is valid until it is executed or canceled by the customer. Say you own XYZ stock and it is currently selling at $50. You believe that the price will move to $65, so you would place a GTC order to sell with your broker. If the price reaches $65 at any point over the next few weeks, your order will be executed and your shares sold. Keep in mind that generally, brokerage firms will cancel these orders after between 30 and 90 days, so check with your broker.

Market On Open (MOO): This is a buy or sell order in which the broker is to execute the order at the market's opening. There is no guarantee the trade will be executed at the listed opening price, but the trade will be executed within a range of prices, or not at all.

Market On Close (MOC): A buy or sell order that is to be executed as a market order as close as possible to the closing price of the day. This order is placed knowing full well there is no possible way to guarantee execution. This order is used best to capture a price before the market closes, with the closing price of the day as your entry price. This is best used when there is after-the-close news or reports that could move a tradable.

Fill Or Kill (FOK): This type of order must be executed in its entirety in one trade, or the order is immediately canceled. You would use this order to enter or exit a position in its entirety, so it is especially useful when you have a big order and want to either buy or sell it. If the order is not filled in its entirety, the order is canceled. The fill or kill order is not placed very often.

Immediate Or Cancel (IOC): This order is like the fill or kill order, except this order can be partially filled on one trade and the remaining will be canceled. The advantage to this one is that you can have the order executed but you are not concerned with having only part of your order filled. This is primarily used for large orders where filling the order quickly is difficult.

Whether or not you realized it at the beginning of this article, there are many other choices when it comes to placing an order than just the regular buy and sell. Market orders are the most widely used, but savvy investors rarely use them. With these other orders, however, you can place them with your broker and not have to watch the market, or worry that you may have missed a price you wanted.

Adding these different types of orders to your arsenal will make you a far better trader. As with any new tool, the first step is to understand what they are and how they work, and the second step is implementing them. Reading this article was the first step. Utilized properly, these orders can indeed become a trading weapon that you can use to make better trades.

John Devcic is a market historian and freelance writer. He may be reached at glatko@aol.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.





John Devcic

John Devcic is a market historian and freelance writer. He may be reached at drmorgus@gmail.com

E-mail address: drmorgus@gmail.com


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