Your job is secure, your emergency fund is in place and you are diligently saving for retirement. You want to invest some money in the market, even buy shares of an individual company stock.

You’ve done all your research and understand your risk level, the asset allocations you want between various classes of investments and you have your eye on a company in which you’d like to own some shares. However, you want to get it at YOUR price, not whatever the market is doing, so how do you go about placing an order to buy or sell stock?

It behooves you to understand these things because your broker may or may not try to educate you about them. For years, as a novice, I used Merrill Lynch and while my broker did a great deal to educate me about stocks and bonds, he never mentioned that I could set the price at which I wanted to buy or sell my stock! For years, I only placed ‘market’ orders. I guess he didn’t want to miss out on any commissions if I set a price that did not result in a trade.

First – Some Trading Basics.

An order doesn’t have to be executed within certain time frames. The price of the stock can vary widely from the time you place the order until the trade is executed.

All shares of the stock in an order may not be bought or sold at the same price.

There are different ways to place your stock order, with different consequences.

You may not be able to get all of the shares you want at the price you set.

There are different ‘markets’ that your stock order can be set to for execution. The broker (or online system) may send it to one of several stock market exchanges (such as the New York Stock Exchange or a regional stock exchange) or it may go to a ‘market maker’. A market maker is a third party who buys and sells stock and these firms sometimes pay your broker an extra penny or so per trade to get their orders. Your trade could also be sent to an electronic communications network that matches buy and sell orders electronically. Finally, it could stay in house at your broker – to be filled from inventory they already own. Sometimes (maybe with an extra charge) you can direct your broker as to which market to use.

Best execution by your broker means that they look for getting the best deal for you on the trade that they can. If you sell shares of abc stock and the market is at $20 per share when you place the order, the broker may be able to get more than $20 a share by carefully choosing which market to use.

The Securities and Exchange Commission site has a couple of articles to help you understand more about the above in their Trading Basics brochure.

How To Place Stock Orders.

Lets move through various scenarios in your stock trading experience.

You want that stock!

The first thing you want to do is just get in there and get that stock purchase done! You want to buy for sure and feel the price is great right now. You want to use a market order.

Market buy order.

You call up your broker and say “Buy 200 shares of xyz stock for me”. Your broker may ask a couple of questions (mainly about how they will get the money from you!). You should ask what their commission and other fees will be as these vary widely. In fact you should ask this question every time you trade and try to negotiate lower ones!!

Once you hang up, the broker submits your order to the chosen market and you later get a confirmation of the trade stating the trade and settle date, the price per share you paid, the number of shares at that price and listing any fees or other expenses associated with the trade. If trading is still open for the day, your transaction will most likely be done fairly quickly. You got a great deal at $9.00 a share for all 200 shares.

Add more stock to your position.

You like this stock so much that you want to buy some more. However, the price has gone up (yeah!) and you don’t want to pay the current market price. You want to use a limit order.

Limit buy order.

You call up your broker and say, “I want to buy another 200 shares of xyz stock, but I don’t want to pay more than $13.50 a share for it. Please place a limit order to buy 200 shares of xyz at $13.50.” Your broker should ask you if you want the order to be good only for the day (as it will be if he or she doesn’t ask), or if it good until canceled. If you choose good until canceled, be sure and find out how long the order will remain in place as most brokers only allow orders to be active for certain periods (for instance at Vanguard it is about a month).

If the stock keeps going up, your order is never executed and is canceled after the period allowed. However, in the meantime, Congress took us over the fiscal cliff (lets just say) and the price fell to $11.75. Since your order was to buy at $13.50 or less, your order is executed and you get the stock. Maybe you get it at $13.50 or maybe you get it for less, maybe even at $11.75! Lets say you get it for $13.00 for our story though.

Your stock is HOT!

You sip coffee every morning and congratulate your self as you look up the price of xyz. It has been rising steadily and is now at sky high prices of $21.90. However, you think that it is starting to be over valued and are afraid the price will fall. You want to lock in some of your profits, but you don’t want to sell while the price keeps going up. What to do? You could do what I usually do and manually keep your eye on the situation and then place a sell order. But, you could also place a stop loss order.

Stop loss order.

You call up your broker and say “I want to keep this stock as long as the price stays above $17. Please put a stop loss on all shares I own at $17”. If the market were to go down and hit $17, your stop loss order would be converted to a market order and the broker would sell all your shares at the current market price (which could be lower than $17).

Your stock is still HOT!

But your stock price didn’t fall and now it is at $25. You really don’t want to risk selling at or around $17 a share if the stock dives. You still want to lock in your profits, but want to keep the stock as long as it is still going up. This time you get smarter and try a stop-Limit order.

Stop limit order.

Once again you call up your broker and tell him. “I want to keep this stock as long as the price stays above $20, but I’m afraid the market will fall.  Please put a stop limit order on it at a stop price of $20 and a limit price of $18”. If the market drops and the price falls to $20, your broker will sell your stock only if it is between $18 and $20.

Your stock is on FIRE.

But your stock price keeps going up. Now it is at $30 a share. You are tired of constantly monitoring it and calling the broker to tell him what to do. You still want to lock in your profits and don’t want to sell below a certain price. Now the trailing stop order is the one you want.

Trailing stop order.

Here we go again, calling your broker. This time you say, “Bob, lets just put a trailing stop on this puppy. Sell half of my stock if it ever dips 10% below the market price. Please put a trailing stop limit order on all my shares to sell at a trailing percent of 10%.” You decided to only sell half of your position because the stock did a 2 for one split a few years back and now you have twice as many shares.

A few weeks pass while the price keeps rising. The price at which your stop goes into effect also rises – always trailing 10% behind whatever the market price happens to be. The stop price keeps going up (never down). The market price reaches $35 a share and then plummets. Your stop price is 10% less than market price ($35 x 10% = $3.50 or $31.50). You sell half your shares at $31.50 and the other half falls as the price continues it’s downward spiral back to $15 a share.

Your remaining stock is making you uneasy.

You still have 200 shares (remember that stock split) after selling 200 at a really nice profit, but now you think it is time to exit gracefully, and want to sell the rest of the shares when they go back up – as you think they will. After all, your cost basis is only around $7 a share (since the split) and you will still make a tidy profit.

Limit sell order.

Now you call your broker and say, “Bob, if the price of xyz goes back up to $16 lets dump the rest! Please sell the stock with a limit order if the price reaches $16.” Unfortunately, the stock never recovers that far so this order expires without being executed. If it had executed, you would have sold the rest of your xyz stock for at least $16 a share. However, the stock has continued to drop and is now at $10.

Catastrophe strikes.

The economy tanks again and you are laid off. Now you are looking for every single source of funds you have just to keep groceries on the table. It’s time to sell for sure. You need a market sell order.

Market sell order.

Call your broker quick and say, “Bob, sell this stock for as much as you can get for it! I need cash fast.” The broker puts your order through and the stock sells for $8 a share, giving you at lease a small profit of $1 a share.

Full cycle.

Now we have been full cycle with xyz stock up and down the roller coaster, using different types of stock market orders to get where we needed to be with this stock. Please understand that I am not a professional and told the above story to try to illustrate and explain the various types of orders. Study the matter further before acting on this information and consult your professional before acting on it. Your broker or trading platform might not allow all types of orders or may charge more to process certain types of orders.

What has your experience been with various types of stock market orders?

Resources:

• The Street: How to Buy a Stock
• SEC: Limit Orders
• SEC: Trading 101 Basics v