Market order - an order to buy or sell shares at the market’s current trading price. This kind of order usually ensures execution, but the price is not guaranteed. For example, a trader may get his/her order executed, but pay a few cents more per share than what was reported when the trade was executed. This kind of order is appropriate when an investor wants to execute a trade immediately, no matter the small difference in cents of the share price. Market orders can only be placed during market hours. If a market order is placed after markets are closed, it will only execute when the market opens next, which will result in the share price being different from the previous day’s market close price.
Limit order - an order to buy or sell shares with a limit on the maximum price an investor is willing to pay or the minimum price a seller is willing to accept (“limit price”). When buying a share, an order could be executed below the limit price and for a seller, the order could be executed above the limit price. For the order to be filled, the investor must input the specific number of shares and the price. However, there is no guarantee of execution. For example, if the stock reaches your inputted limit price, your order may not be filled if orders ahead of yours limit the availability of shares at the limit price. Thus, orders are executed on a first come, first served basis. A limit order is appropriate when an investor believes they can enter a position at a price lower than - or exit a position at a price higher than - the current market price.
Stop order - an order to buy or sell shares at a specified price once the share has traded at or through the stop price. First, the investor must input the order with the amount of shares and the stop price. If the share reaches the stop price, the order becomes a market order and gets executed at the next available market price. If the share does not reach the stop price, then the order is not executed. Sometimes referred to as a “stop-loss,” this kind of order protects an investor’s unrealized gains or minimizes their potential losses. After entering a position, an investor can choose to put a stop loss above the market price (to protect their gains) or a stop loss under the market price (to minimize their losses). By doing this, an investor protects their position and reduces their volatility risk (explained later).
Kate works at a jewelry company and trades TSLA shares on the side. She wants to enter an order that will allow her to exit her position without needing to constantly look at her brokerage account. What order is most appropriate?
- Stop order
- Limit order
- Market order
Answer: Kate would want to input stop losses on her position so that her brokerage account can automatically exit her TSLA position once she makes an unrealized gain or to minimize her losses should the share price crash.