Invest Like a Pro with Stop and Limit Orders
It’s one thing to understand the concept of buying and selling stocks, but successfully putting that concept into actual practice means understanding how trade orders work. Different types of trade orders tell a broker how to execute a trade. There’s more than one strategy that can work and it all depends on what type of trade you want to do.
Instead of relying on market forces entirely when it comes to placing a trade, you can use stop and limit orders to narrow down price points and ensure the best possible deal. There’s no worse feeling than placing an order to buy or sell a stock at a price you want, only to have it come through later at a price you didn’t want.
How to use stop and limit orders in your portfolio
A general stock order is known as a market order. When a market order is placed, you are essentially telling your broker to buy or sell a stock, but you don’t specify a particular price. Thus the actual price you buy or sell at could differ from what you saw when you placed your order – in some cases the difference can be significant. If you want to specify a price, you’ll have to use a stop or limit order.
A stop order tells you broker to execute a trade only when the specified stock reaches a particular price. This type of order is best used to sell a stock. For example, let’s say you owned 100 shares of XYZ stock and it’s currently trading at $20.50. You want to lock in profits at $20 so you place a stop order, also known as a stop-loss order, at $20. Now if the stock drops to $20 or below, you trade order will be triggered and the stock will be sold. If it doesn’t fall, no trade takes place.
A limit order on the other hand sets a minimum or maximum price that has to be reached for an order to go through. Let’s go back to our example with XYZ stock trading at $20.50. If you wanted to buy the stock when it hit $20 a share, you could place a limit order to buy at $20. If that stock drops, the order will be executed; if it doesn’t, then no order is placed. If you already owned the stock, you could place a limit order to sell at $21 per share. If it reaches that level, the stock will be sold.
Successful investing requires a certain time commitment in order to achieve. Putting in the extra time and effort to understand how different stock orders function will help take your portfolio to the next level. By eliminating the possibility of buying or selling a stock at a price you don’t want, or worse yet, not selling at a price you want, you can streamline your gains.