There’s a lot more to investing in stocks, bonds or exchange traded funds (ETFs) than meets the eye. People go to school for years to learn the ins-and-outs of investing, while others just open a brokerage account online and plunge ahead. There’s no sense in jumping into the deep end of the pool without learning to swim, though. There are innumerable resources to help you and me learn how to invest and this article is one of them.
What are the two main types of stock orders?
There are two types of orders you can use when buying or selling a stock:
- Market order: You agree to buy or sell a particular stock at the price specified by the market.
- Limit order: You specify the maximum price at which you’re willing to buy, or the minimum price at which you’re willing to sell.
|Market Order||Guarantees that your order will execute, regardless of any rise or fall in the share price.||Your order can execute at any price the market determines, including a price that’s higher or lower than you’d prefer.|
|Limit Order||Prevents orders from executing at prices above which you want to buy or below which you want to sell.||Your order will not execute unless the conditions that you specify can be met in the current market .|
Commissions paid to traditional brokerages are generally lower for market orders than for limit orders, though the price difference is rarely substantial enough to justify using a market order. Of course, if you’re using Scottrade, Zecco, Etrade, TradeKing, or tradeMonster, ALL trades are the same price regardless. That’s one big advantage the online brokerage houses have over the traditional boys.
When to Use Limit Orders
In general, I recommend that people use limit orders every time they buy or sell stock. Investors can avoid the main downside of using limit orders — that your order won’t execute due to sudden market fluctuations — by setting a bid price equal to your stock’s current ask price. The ask is the lowest price for which an owner of the stock is currently willing to sell; the bid is the highest price a buyer is currently willing to pay.
For example, if you wish to buy a stock with a current ask price of $10.18 (and you’re comfortable paying that price), place an order that specifies $10.18 as your limit. You’ll be certain to obtain the shares as long as the seller is offering as many shares as you’d like to buy. At the same time, the limit order guarantees that you won’t pay more than $10.18 per share.
What is bid price and ask price?
The bid price is the maximum price another person or brokerage will pay for a certain stock. The ask price is what that person or brokerage will sell it to you for. There is almost ALWAYS a spread – the difference between the bid price and the ask price. That spread is profit to the broker.
Think of it this way – you know the bid price and the ask price for cars, right? A car dealer may “bid” to buy your used car at $12,000 … but he certainly won’t sell it for that. He’ll “ask” someone else to pay $13,500 or more. The difference (spread) is the dealer’s profit.
When to Use Market Orders
Use market orders only if you absolutely must sell your shares of a stock, regardless of price. Market orders can sometimes be delayed and they always seem to NOT fall in your favor. Sell orders mysteriously sell at the lowest price and buy orders at the highest.