Order Types

If you’re new to the world of investing, it may be easy to oversimplify the act of trading, watering it down to a simple game of pushing a button to buy and pushing a button to sell.

While it is indeed possible to trade in that manner, it’s far from the only way. In fact, because of the way the market works, it’s often quite wise to get familiar with the various types of trade orders investors can make. Doing so tends to lead to decisions that protect your investment even as it grows.

How Versus When

It may not look like there’s much behind turning a profit on the market. On paper, it may appear to be a simple manner of watching a stock go up or down on a chart and act accordingly. While there is no denying that stocks move up and down, merely reacting to these trends often isn’t enough. It’s important to know how you should react to the trends when they manifest themselves.

Knowing “how” instead of “when” advances trading to its savvier form; one where risks may be mitigated, profits can be maximized, and stress levels may end up dissipating to some degree. If you don’t know this, your days in the market may quickly start looking like your days in Vegas.

Long and Short Trade Orders

Perhaps the best way to realize the importance behind the “how” of trade orders is to weigh the differences between ordering an extended trade versus making a short trade. On the surface, trading may be simple. You’re either anticipating the market to gain or to lose. However, knowing when to order an extended trade versus ordering a short trade may make it possible for you to profit from the market regardless of how the pendulum swings.

Long trades are typically bought when the market is rising. This is simply done by purchasing a stock, kicking back, and watching it grow. Usually, in this case, investors will put parameters in place to control loss should the market take an unexpected tumble. Short trades, on the other hand, are bought when the market is in a downturn. Investors will use tactics such as stock borrowing, drafting a futures contract, or another scheme in which traders can buy shares or contracts back to make a profit and pay off brokers down the road.

The best way to look at these trade orders is like this: If you’re looking to make a profit from a rising market, you’ll want to make a long trade. If you want to make a profit from a falling market, on the other hand, you’ll want to make a short trade.

Market Orders

Market orders are far and away the most simplistic type of trade order you can make. Typically, the interface that you deal with in these trades strip away the extraneous stuff, literally reducing the trade to a “buy” and a “sell” option.

The option to this type of trade is to make a guaranteed buy or sell as swiftly as possible so that it can be filled at the market price showing. This eliminates the stress that may come with worrying about whether or not an order was going to get filled. The only caveat to this method is, depending on how popular the trade is, the investor may not get the “perfect” deal. The price may bump to a higher price by the time the transaction is officially complete, which may wreak havoc with an investor’s overall investment plans.

A Limit Order

A limit order is an order trade built for those who like to pinpoint their trades. Investors will use a limit order to mark a specific price where a buy or sell order must be executed. This essentially works to “lock in” a price for market action to occur, should the stock in question reach this targeted number at all.

This methodology enables traders to enjoy a little extra control to their orders, as opposed to the looser parameters found in a market order. The one thing that traders that do this order type is to make sure they are placing the order on the proper side of the market. When they want to enter a limit buy order, investors have to specify a price that either is at or below the current bid. Conversely, for a limit sell order, the specific price must be at or above the ask of the current market. If this isn’t followed in this manner, the investor may experience a world of hurt.

Stop Orders

A stop order also places a substantial layer of investor protection out of all the order types. Mostly, this order is activated only after a certain level has been reached. These orders function in the opposite way of limit orders; a buy stop order will be placed on the market, while a sell stop order is placed below the market. When the stop level is reached, the order instantly converts to a limit or market order, depending on the type of order specified.

Stop orders have a reputation for being filled with a little more consistency compared to other markets. As such, they tend to be considered the most commonly used order type on the market.

A Conditional Order

In a way, a conditional order is a variation of stop orders and limit orders. This order type is only triggered if specific criteria set by the investor is met. This type not only can lead to an order submittal but also an order cancellation.

This particular order is typically considered to be the most basic form of automated trading. There are two common types of these orders. The first is the order cancels order, which allows investors to place several orders at once, only to have them cancelled once one order is filled. The second is the order sends an order, which sends specified orders to the market once a primary order is filled.

Lots of Orders, One Common Goal

The vast number of order types that exist could make a novice investor’s head spin. However, it’s important that those just getting involved in the market stay calm and learn the ins and outs of how to place an order. Doing so could spell the difference between generating a profit or generating a loss. Orders are a way to automate your trading and protect yourself with stop loss trades.

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