If you’re just starting out, one of your first questions will most likely revolve around buying stocks. How do you invest and what do all of these buy orders mean? There are five types of orders available on the Robinhood app, which is the recommended starting platform. All of the variations have a purpose and understanding them will be critical for success trades. Tip: there are just as many sell orders.
The Market Order
This is the most basic of stock purchases, which allows you to buy at the best price possible with available shares. The key here is the word “available”. Market orders can vary based on the movement of the stock and you’ll most likely receive your shares at a higher price than anticipated. This is especially true if you’re buying large amounts or “blocks”. However, this buy method will guarantee that you’ll get a spot in the desired stock. Why did my order go through at a high price than I expected? It is critical to remember that every stock you buy – is being sold by someone else. The price you buy is a negotiation between two parties, which is more easily seen in the order book (Advanced trading).
The Limit Order
The limit order is a trader’s best friend, especially while using Robinhood. Using a limit buy will put a concrete price limit on the shares you are seeking. Meaning, if you submit an order for stock XYZ at $10 the order will only be fulfilled for shares equal to or less than $10. However, as you put buying pressure on the order book the price could potentially increase due to supply and demand. These orders fulfill throughout the day whenever they are available. If there are no more shares at $10 then your order will never be completely filled.
Trailing Stop Order
This buy order is for executing specific trading strategies and shouldn’t be used lightly. The trailing stop order allows you to purchase stock once it bounces off its lowest point, or resistance. More information on this is in the “How to read charts” post. It’s fair to say that stocks have two-legged moves before they begin to trend in any direction. Basically, a value increase of 5% is interesting, but unless it’s a two-legged move, it could be a fluke. The move should resemble a rotated Z (Photo below). The trailing stop order (TSO) allows you to get into a stock during a reversal or trend verification. If the stock goes up 5%, then dips 2%, you can place a TSO to buy once the stock raises another 5% from the recent low. This ensures that you’ll secure a spot after the stock has proven that is trending upward and prevent you from buying a stock that is trending downward.
The Stop Order
This is similar to the previous market order, but it is less dynamic. This will fill the same as a market buy, but only once the stock exceeds the desired price. Again, this is critical for “setting a trap” on stocks potentially trending upward. By placing a stop order above the resistance line, you can improve your odds by securing a spot into an upward trending stock. Suppose stock XYZ cannot break $10.50 and keeps bouncing 10 cents below. By setting a stop order for $10.55, you can hedge your loses by ensuring you only buy in once the order book has adequate buying pressure. However, this is a market buy and since you’re requesting to buy shares on an upward move, the price will likely be higher than desired.
The Stop Limit Order
The stop limit order allows you to set a trap on an upward move and acquire stocks at only the price you set – or cheaper. You might be saying “perfect!” but you’re mistaken. This is the least useful market order for beginner traders. Why? Let’s recap on what we know:
- Limit orders set a maximum price you’re willing to buy at. Your order cannot fill over the set price and will continue to attempt to fulfill the entire order over X amount of time.
- Stop orders are used to catch stocks in an upward move.
- Stop orders are not normally used on obviously trending stocks.
Combining these two features will result in your order being partially filled. It will also continue to try and fill until you cancel it. Meaning, if the stock jumps and fulfills the stop limit price then immediately falls, your order will continue to fill all the way down. Market orders can be canceled, but nothing is immediate.