Tim du Toit is editor and founder of Eurosharelab. On his website he reveals what more than 20 years of equity investment have taught him – sometimes at considerable cost. To discover how you can avoid costly mistakes and enjoy greater profits, sign up for his free newsletter “Investing that makes sense” at www.eurosharelab.com
am sure, especially if you use an internet based stock broker, you have seen or used some of the numerous types of orders you can choose from.
But do you know what they all mean?
And do you know that they can also increase your returns by giving you a better purchase and sale price?
In this article I will give you a quick overview of the different order types and how you can optimally use them.
This is the simplest and the quickest order to get executed.
When a market order is issued, your broker will sell or buy a stock at the current market price, whatever it may be.
Depending on the market conditions, your order may not always get executed at the desired price you think it will.
For instance, if there is a lot of volume traded in the stock, you may get a price close to the price when you entered your order.
Be careful though as market orders may move the stock price substantially if the volume of your order is high compared to what is traded at the time.
So, essentially, you should use this order when you desperately want to buy/sell a security regardless of the price or if your order volume is small compared to the volume traded in the market.
A market order gives you as the buyer or seller no control over the price but it will ensure that your order gets executed if there is enough volume to do so.
I only use market orders when buying very large market value companies, where the amount of shares I want to trade is a small fraction of the daily turnover.
In terms of brokerage costs market orders are the most inexpensive type of orders you can place because your broker does not have to go to much trouble to get them executed.
These types of orders are as popular as market orders; however, they have a major advantage…
they let you control the price at which the order is executed.
As the name suggests, with a limit order, you tell your broker to buy or sell the security at a maximum or minimum price.
The order will only be executed if the price is within the limit you have set.
For instance, if you set a buy limit order for €50 but the current market price of the stock is at €60, the order will not be executed unless the price drops by €10 to €50.
Limit orders can effectively be used to control your entry and exit in to a position.
Note that you may need to pay a slightly higher commission when you place a limit order. But if the volume traded in the company is low it is always worthwhile.
I should also mention here that with a limit order your order will never get executed is the price you set is not reached.
For instance, if you have set a sell limit order at €40 and the current price of the stock is €30, and it does not reach the limit you set, your order will not be executed.
Also a buy limit order will be executed at the limit price or lower. Similarly, a sell limit order will be executed at the limit price or higher.
It is also possible to further restrain buy and sell limit orders.
This can be done with FOK (Fill or Kill) and AON (All or None) orders.
When you place a FOK limit order, it will either be executed in full or cancelled (executed in full here means buy the number of shares you ordered).
On the other hand, when you use an AON limit order, this order will also be executed in full; that is it will be filled with your ordered number of shares. However, if it cannot be filled, it will not be cancelled (as is the case with a FOK order) but will be held for later execution.
The AON is a very good type of order to use when you are buying or selling illiquid shares. It will avoid multiple transactions of small amounts of shares that can be very expensive in terms of brokerage.
Unfortunately this type of order is not available from all brokers and at all stock exchanges.
Stop Orders or Stop Loss Orders
Stop orders can be placed for buying as well as selling. To either buy a share or sell if a certain price is exceeded.
They are however mainly used to limit your losses by protecting you from a big drop in the price of a stock.
With a stop loss order, you tell your broker to sell the share if it falls below a certain price.
Stop loss orders are generally entered below the current market price. If the price of a share falls to this price, the broker will execute your stop loss order.
It’s important to know that when triggered your stop loss order becomes a market order and it will be executed at the current market price.
For example when you use a sell stop order, you are instructing your broker to sell the security at the best available price when the stop price has been breached (see Market Orders above).
If the price of a stock stays above the stop price you set the stop loss order will not be executed.
Alternatively, you can also use the buy stop order to take advantage of a declining market so you can buy a stock once a certain lower price has been reached.
Stop limit order
This type of order combines the features of a limit as well as a stop order.
Once the stop price is reached; instead of a market order (like in case of normal stop orders), the stop limit order turns into a limit order. This means that the security is bought/sold at no more or less than your pre specified price.
This type of order is a good choice when buying or selling illiquid shares.
Be careful if you want to use this type of order to limit losses, because if the stock price has fallen enough to exceed your stop price it may also have fallen past your limit price.
This means your stop limit order will not be executed.
Trailing Orders or Trailing Stop Orders
Like the name suggest, a trailing order is essentially a stop order where the stop price is not fixed
A trailing stop order thus is similar to the regular stop orders apart from the stop price which is usually set as a percentage change from the price of a security.
This means if the price of a share were to change by 10%, the order will be triggered.
A trailing stop order can thus be very effectively used to protect your profits.
If you have a profit on a position you can use the trailing order to follow the price of the security. If the market value of the stock declines by a percentage you specified, the trailing stop order will become a market order and will be executed.
On the other hand, if the price continues to rise the trailing order will follow it and allow you to participate in further gains.
Trailing stop limit order
This type of an order combines the features of both the trailing order and the limit order. Instead of becoming a market order when triggered a trailing stop limit order becomes a limit order (see limit order above)
You would use this type of order if you want to only have your order to be valid for one day.
Your order will thus be cancelled when the market closes.
Good –Till-Cancelled-Order (GTC)
This type of an order can theoretically be in force indefinitely; however your broker may set a limit on such orders for example 90 days.
As the name suggests, these orders are in effect until you cancel it.
Immediate-or-cancel order (IOC)
This type of order is either immediately executed or cancelled.
However, unlike fill or kill orders an IOC order can be partially executed.
Market on Close and Market on Open (MOC & MOO)
These types of orders will guarantee that you get the open or close price respectively.
One cancels the other order (OCO)
This type of order is used if you have two orders in the market but you only want one of them to be executed.
The execution of the one order will automatically cancel the other order.
Here is an example.
If you are invested in Microsoft at $20 a typical OCO order would be a stop loss order at $15 and a sell limit order to take a profit at $27. If one of the orders is executed, the other is automatically cancelled.
As you can see that are a lot of order types what give you quite a lot of opportunities to limit losses, lock in gains and give you a better buy or sell price.
The first step you should take is to look at what order types your human or online broker offers and how they are defined.
This is important as the exact nature of an order may differ slightly from broker to broker.
Once you have learned what is available you are free to start using them to your advantage.
Your orders analyst
Tim du Toit