How Stocks are Traded
Buying and Selling
The old adage, buy low sell high is the premise of trading stocks. Though investors can also short stocks, sell high and buy low.
Is an order an investor can give to their broker to immediately, either buy or sell at the best available price. For liquid stocks there is generally not to much of an issue in being filled at or near the last price. However with illiquid stocks, the price can slip in the process of executing the order.
A limit order allows an investors to set the actual price they wish to buy or sell at. A buy limit order will only be executed if the stock trades at the limit or below the limit price. A sell limit order will only execute, if the stock trades at the limit price or above.
Stops and Stop Loss
Buy Stops- Are market orders to buy a security at a price above the current market price. The order is only triggered once the market reaches the buy stop price. This type of order can be used to act as a stop loss when shorting a position or to enter a position when a security has broken out.
Sell Stops- Are market orders to sell a security at a price below the current market price. The order is only triggere once the market reaches the sell stop price. This type of order is used as a stop loss for long positions and is also used to enter short positions when a security breaks out.
Stop Limit- A stop limit order is similar to the sell and buy stops, though rather than being executed as a market order, the order is entered into the market as a limit order.
Trailing Stops- Have dynamic prices that adjusts with the current market price. Investors can choose either a certain percentage or dollar amount from the current market price. The investor then chooses either a trailing buy or stop depending on whether they are long or short. A trailing sell stop will continue to increase while the stock continues to go higher, however once the market begins to decline the stop becomes static. This works in the reverse for trailing buy stops.
- This order is used by investors who believe a security will depreciate in value. To execute the order the investor must first borrow the stock and then sell it. The investor doesn't own the stock during the trade and profits when the stock's price falls and loses when the stock price rises.
Buy to Cover
This type of order is used to close out a short position.
GTC - Good Till Cancelled means the order is valid until the trader cancels it with his broker.
GFD - Good For Day means that the order will be cancelled at the end of the day if its not executed during the trading day.
IOC - Immediate or Cancel is an order that requires all or part of the order to be filled immediately, otherwise it will be cancelled. This is usually used for large block orders that are difficult to fill and avoids the order being filled at multiple prices.
FOK - Fill or Kill is an order than needs to immediately and in its entirety, otherwise its cancelled.
GTD - Good Till Date allows the investors to set an expiration date and time for their order. If the order isn't filled before this date, it is cancelled.
GTEM - Good Till Extended Market is an order that is active during the normal trading session as well as the pre- and after-hour markets.