You are learning to trade the stock market and one of the most important steps you can take to ensure your profits is using stock orders. When you understand the types of stock orders which are available and how to create and submit them to protect your capital, then you are off to a great, solid start in the world of trading.
At TradeSmart, we strongly recommend using a virtual trading account and practice in the marketplace with training account before using real world capital. Some places to begin practicing your trades would be:
Trades have four primary order identifiers: long, short, open, and close. These could also be viewed as two types of stock orders, long and short, with two possible purposes, to open a trade or to close a trade. If you see a stock you believe is going up, you want to buy that stock, and you will aim to sell that stock for a profit after the value has increased. This is called a long trade or going long.
On the contrary, if you see a stock you believe is going lower, you want to sell that stock while it’s high so you can buy it lower later. This is called a short trade or shorting a stock.
Both short and long trades have one of two possible purposes. These actions either open a trade or close a trade. Now, an open order is an order that initiates a new trade, be it long or short and a close order is simply an order to end a trade. You can buy or sell a stock to open a trade, and you can do the same to close a trade. However, your closing order will always be the opposite action from what you used to open the trade.
For example, you open a long trade by buying a stock. You will close that trade by selling the stock. In the example of the short sale, you want to sell high and buy low. The selling high opens the trade, and buying low closes the trade.
You may be wondering how one sells a stock he or she doesn’t own. In the case of the short sale, if you see a stock you believe is going lower, you will sell the stock by borrowing the stock shares from a broker. You buy the stock back later at a lower cost, and the price difference would be your profit. The actual stock shares are returned to the broker. Thus, you have opened the sale by selling and closed the sale by buying and returning the stock. A short sale is essentially a long trade in reverse.
In either case, your strategy is always the same: buy low and sell high.
For a deeper dive into the basic types of stock orders please read our follow up blog 4 Stop Order Techniques to Help Save Your Capital.