What Does Order Type Mean in Online Trading?
Online trading has grown by leaps and bounds over the last two decades, availing anybody with a computer and basic Internet connection the ability to trade stocks across the globe. Using a combination of market, limit, and stop loss orders, a trader can pursue multiple stock market opportunities while diligently managing his risk.
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Purpose
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Different types of orders suit different situations and investor objectives. For example, an investor looking to rapidly buy into or sell out of the market would probably use a market order, since this instructs his broker to fill his order immediately, at the next available price. In situations where an investor is willing to sacrifice speed for an optimal price, he'd use a limit order.
Market Orders
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Market orders allow traders to enter or exit the market immediately, at the current market price. These orders are used when speed is more important than getting a precise price. They are best used on big-name, high-volume stocks, where there's a good chance an investor can get an order filled very close to the last quoted price. Market orders are not ideal for trading obscure, low-volume stocks because of the risk that the order itself will produce a large price movement, resulting in the trader getting her order filled far above or below the real market price.
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Limit Orders
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A limit order is a buy or sell order that is limited to the price set by the investor. For example, if an investor likes a stock at $29 but thinks it might be coming down to $27, he could place a limit order at $27 and would only get his order filled if the stock hits that price.
Stop Loss
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A stop loss order is used to limit risk on trades. Typically, stop losses are set at a percentage level of loss that an investor would find acceptable if the trade doesn't work out. For example, an investor might thinks a company's stock looks appealing at $50 a share, but in case his decision is wrong, he sets a ten percent stop loss at $45. If the stock price falls to $45, his position will automatically be sold out, eliminating the risk for any greater loss.
Day Orders vs. Good 'til Cancelled Orders
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Day orders or Good 'til Cancelled Orders are modifications to standard market or limit orders. A day order means a buy or sell order for a specific price is only good for the trading day, and if it is not filled at the end of that trading day it will be cancelled. A Good 'til Cancelled (GTC) order, meanwhile, is open much longer. Depending on the broker, a GTC order can be open for anywhere from 90 to 180 days in the event the stock's price does not touch the order price.
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References
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