Lately, I've been receiving dozens of e-mails from readers regarding the different types of orders you can put in when buying a stock. It's a question that I'm sure everyone wants to know when they first get started buying stocks.
When you want to buy or sell a stock you're usually given three choices by an online broker (some offer more but, for the most part, you're usually given three): you can either place a "market order", a "limit order", or a "stop order".
The market order is a pretty common order. What it basically does is it tells your broker to buy the stock at the market price (what it's currently trading at). These orders are usually all right if you place them when the market is open because you'll likely buy the stock at what it's trading for. However, you should be careful when placing these when the market is closed. The reason is because if you place a market order after the stock market has closed for the day, the order will be filled the next trading day. If the stock goes up a lot in after hours trading (we'll cover this in a later article), you might end up paying a lot more for the stock then you had expected.
A limit order is what a majority of investors tend to use. It offers more safety when investing because it allows you set the price that you want to buy or sell a stock for. A buy limit order allows you to set a price that's below what a stock is trading for so that when the stock goes down, you can buy it at that price. For example, if XYZ was trading at $40/share and you place a buy limit order for $35/share, you're basically telling your broker, "buy XYZ when it drops down to $35/share". A sell limit order is the exact opposite. It allows you to sell the stock you own for a higher price. For example, if you own XYZ and you want to sell it when it hits $45/share, you can enter a sell limit order.
A stop order is another useful order for you to place when investing. It prevents you from losing more money when the stock goes down. When you place a stop order, you're telling your broker to sell the stock when it goes down a certain amount. For example, if you own XYZ stock and you've made a ton of money, you might want to protect some of that. You would enter a stop order for $35/share so if it dropped down to that, you would automatically sell the stock. Therefore, if the stock continued falling to let's say $15/share, you wouldn't be hurt as bad because you had already sold the stock. When you place these, you have to be careful. I don't recommend you place stop orders that are close to the current market price because if the stock dips down to that level during the day, the stock will be automatically sold even if you didn't want to sell it that soon.
I hope this answers some of your questions about different types of buy and sell orders you can make and perhaps you can put this info to use.