Know the Best Type of Order - STOCK MARKET RULES

Know the Best Type of Order

There are many different types of stock orders an investor can place. Some are of debatable value and are seldom used. Following are simplified descriptions of some of the basic types of orders.

MARKET ORDER
Best available price; it should be filled as soon as possible. For example,
an investor calls a broker and learns that shares for XYZ Corp. are trading
at 55.25 to 55.375 and the last trade was at 55.375. The investor says: “I
want to place a market order to buy 200 shares of XYZ at the market.”
Computers make this order easy to enter and easy to fill. In all likelihood
the investor can get a verbal confirmation of the order execution while still
on the phone. The broker comes back to the phone and says: “Confirming
a buy of 200 shares of XYZ at the market. The order was filled at 55.375.
The settlement is regular way,” which means the current trade date plus
three days, or T + 3.
The main advantage of this type of order is that it’s placed and filled immediately. The disadvantage is that it’s impossible to know the price ahead of time.

LIMIT ORDER
Specific acceptable price; it should be filled when the trade can be com-
pleted at the order price or better. If the order cannot be filled, it remains
as a limit order until canceled. It can be entered as a one-day-only order or as a good-till-canceled (GTC) order. For example, “Buy 200 XYZ at a limit price of 55, good for today only.” The order is entered by the broker. If 200 XYZ can be purchased at $55 a share or better, the order is executed. If the limit is not activated, the order is automatically canceled at the end of the trading session.

BUY STOP ORDER
Best available price once the stop price is traded on or through. “Buy 200
XYZ with a buy stop at 59. Put the order in, Good till canceled.” The buy
stop is placed above the current trading price. The investor wants to buy
the stock only if the price is moving up. The order to buy 200 shares will
become a market order if XYZ stock trades at $59 a share or higher. If the
order is not executed within a time specified by the brokerage firm—usu-
ally end of the month, 30 days, or the end of the following month—it is
canceled.

SELL STOP ORDER
Be careful with stop orders. If they are too close to the current price, the
specialist will come after them. Some investors make the mistake of plac-
ing stop orders within 10 percent of the current price. Many times the end
result of this strategy is to doom their investment portfolio to a 10 percent
loss.
The sell stop is placed below the current market price. The price should be selected by checking a chart of price movement. The sell stop is considered a defensive strategy, selling the stock in a sharp decline.

STOP LIMIT ORDER
Specific acceptable price, once the stop price is traded on or through. The limit price can be placed at the same price as the stop or at an entirely different price from the stop price. If the order cannot be filled, it remains as a limit order until canceled.
“Sell 200 shares of XYZ at a stop of 48, with a limit of 46, Good till canceled.” The stop will be triggered if the price of XYZ Corp. trades at or through $48, and will sell immediately if—and only if—the order can be executed at $46 a share or better. Again, the unexecuted order will
remain in the system for a length of time designated by the brokerage firm unless the order is canceled.

MARKET IF TOUCHED
Market If Touched (MIT) is an order qualifier for buy orders placed below the current trading price and sell orders placed above the current price. It is executed if the security trades at or through the current price. Effectively, MITs are the opposite of stop orders in terms of dynamics. They are used extensively with futures trading.

MARKET ON OPEN
Market on Open, or On the Open, is an order that specifies the market opening as an activator. This order does not guarantee the opening price. Obviously, it must be placed before the market opens.

MARKET ON CLOSE
Market on Close, or On the Close, is an instruction to a stock exchange floor broker to execute the trade at the best available price during the last 30 seconds of the trading session. There are no guarantees that the order will be filled or that it will be filled at the final trading price.