If you want to buy or sell stocks, you’ll need to decide which type of stock order is best for your needs. As someone who is new to trading or wants to know more about what goes into making a trade, you must be aware of all the options that are available and what they mean for your investment strategies.
Stock market basics typically start with investing in either an index fund or a mutual fund. In this article, we will be focusing on individual/retail stock trading, where people have their investment portfolios. Retail traders can make no less than three different types of trades: limit orders, market orders, and stop-loss orders. To learn more about stock market you can on Saxo Bank page.
Limit orders are the most common type for individuals, and these place a requirement on the price that a trader is willing to spend or receive on the security they’re buying or selling. If you were looking to sell shares in Apple (AAPL), you could set up a limit order that would “sell” your stock if someone offered $100 per share. There’s no guarantee that your order will be filled since this is just one side of what could turn into an active market for AAPL.
On the other hand, market orders state how many shares you want to buy or sell and do not include specifications about what price you’ll be paying/receiving. The only difference between them at this point is that you will fill one order, while the other may not.
Stop-loss orders are market orders that set a price level below which you’ll trigger an automatic sale of your position. It effectively lowers the chances that you’ll end up with losses by setting up an exit strategy before any significant declines come into play. The only difference between stop loss and limit orders is that one takes place once a specific price has been hit, while the other may take longer to become active if prices do not meet the threshold specified.
Stop-limit orders are similar to stop-losses in how they work, except they combine both elements of trading strategies. These include two triggers: first, the security needs to drop beyond X% from the stock’s previous close, and second, it needs to continue falling until it reaches a certain level. Similar to stop-losses, these will help you avoid future losses if prices drop but should only be used when stocks are too unstable for your tastes.
We’ll still cover what limit orders are in this article (no pun intended), which is one type of trade that most individual traders prefer over market orders. Before delving into what they are and how to use them effectively, though, let’s talk about why using limit orders is crucial since they’re one of the most basic techniques for placing buy or sell requests.
Limit order basics
First, the primary benefit of using limit orders is that it helps you plan out your trading strategies. Additionally, placing this type of buy or sell market request can indicate how confident you are in a specific stock. If you’re only willing to pay $90 for shares of Apple, then that indicates that your market sentiment about AAPL could be negative despite its current price levels.
If investors have high confidence in security being purchased, they’ll set up buy limits anywhere between 5% and 10% above the prevailing price level. On the other hand, if they don’t want to purchase at any given price above this marker value/s*, they could instead use a “sell limit” and place their market order below the prevailing price level. By doing this, they’re only making an offer to have their position filled if/when prices fall into that favourable range.
In some instances, you can set up limit orders with a negative value in them. If the security’s share price rises by this amount or more from its previous close, you don’t want your shares filled at any given point during the day. This is commonly used in shorting strategies where investors are betting on a stock going down instead of up in a given time frame.