Stock Market Made Simple: Market and Limit Orders
In our last blog, which you can read here, we covered using trading terminologies such as bears, bulls, open, and close which helped establish a broad understanding of market principles. In today’s blog, we are going a step further to discuss placing orders and closing open positions.
What is a Market Order?
A market order is the type of order you will place if you are looking to buy or sell stock at the current best available price on the market. A market order is best used when a company has a lot of trading volume because the chances are higher your order will be filled at the price point you want when the pool of shares trading hands is large. If the stock you are doing a market order on has very little volume, then there can be a substantial price slip from when you executed the market order to when it was filled. Thus, you can end up paying more for a stock or even selling a stock for less than you imagined. Market orders are best served when you want to get in or out of a trade quickly and when you are not worried about a little slippage here and there on price points.
What is a Limit Order?
A limit order is the type of order you will place if you are looking to buy or sell stock at a predetermined price of your choosing or better. A limit order is best used when a company has limited volume of trading because it will protect you from price slippage, which can occur between the time you place your limit order and when it is filled. Placing a limit order allows you to control the price at which you are buying or selling a stock, but with low volume companies, it does not guarantee a buyer or seller will meet your posted price point. Limit orders are best used when you have a price in mind for a trade because you can order the trade and walk away from it. If it executes, you are happy with the trade; if it doesn’t, you can reset the trade when you are ready. In short, it allows trading with little to no worries or fear of market shifts.
In closing, if you are like me and just starting in your trading journey, it is best to trade companies which have a high volume. Here are TradeSmart, we recommend companies which have an average volume of one million shares or more. You can trade smaller volume companies; however, we would suggest you research the company more in-depth so you have a greater understanding on where the company currently is financially and where they are going in the future. Hope that helps and check back with us next week for a discussion on stop orders. See you then!
