There are many factors that go into placing a stock trade correctly
There are additional qualifiers that can be placed. (What you can do will also depend on the broker you use.) IOC (Immediate or Cancel) order requires that the order gets executed immediately, either fully or partially. AON (All or None) order doesn’t accept partial fills. It must be filled completely or is canceled at the end of a trading day. FOK (Fill or Kill) order demands that there’s a complete fill immediately. There are even more qualifiers, but many online brokers don’t offer them. IOC, AON, and FOK qualifiers don’t have to be placed when making an order. They are optional. They can also be unnecessary, especially for small orders on stocks that are frequently traded and where liquidity and market depth are high.
Stop orders are optional too, but are used by some market participants. Stop orders are intended to protect from excessive losses or to lock into profits. Stop orders are placed on long positions below the current market price. They serve as protection from excessive losses. Once a price reaches the stop price, position is sold. But, there is no guarantee that the order will be executed at the stop price. For example, a stock trades at $10 and the stop is placed at $9. After the market closes, bad news come out. The opening price is $8 and the order gets executed at that price. A few brokers do offer guaranteed stops. These types of orders cost more.
Stop orders can also be placed on short positions. In that situation, a stop order is placed above the current price.
It is also possible to place a stop limit order. Let’s say, a stock is trading at $21. A stop is placed at $19.50 and so is the limit. If a price declines at $19.50, a stop is activated, but the trade can’t take place unless a sale can take place at $19.50 or more. If the market drops fast, the order may not be executed. What many traders do is place the limit a bit below the stop price. (For short sales, it is the opposite.)
It is also possible to place limit orders above the current price and stops below the current price (for long transactions). For example, a stock trades at $45. A trader places a stop at $39 and a limit at $65.
There are other stops such as trailing stops. Often, these allow traders or investors to lock into profits. Here’s a trailing stop example: A trader buys a stock at $33. It goes up to $39. He then places a trailing stop at $37 and sets it to adjust by a dollar for every dollar the stock moves up. Now, let’s say, the stock moves to $40, then the trailing stop gets adjusted to $38.
The prices set for stops and limits aren’t always arbitrary. Many traders look at charts and place their stops at key levels such as support and resistance points.
Related articles on this site:
Order limits, stops, qualifiers, and duration
The most common type of an order is a market order. When a market is open, it is meant for immediate execution. When market is closed, it is set to execute at the open. Note that often the opening price is different from a closing price. At times, this difference can be substantial, especially if major news come out after the market closes or before it opens. Therefore, placing a market order after the close is risky.
Some stocks are also illiquid, which means they don’t trade frequently. Usually, these are tiny companies. Due to illiquidity, the difference between the bid (price at which you can sell) and ask (price at which you can buy) can be substantial, adding to the cost of trade execution. Also, if the quantity you want to trade is rather large in comparison to daily trading volume, your order can “move the market,” meaning a part of your trade can get executed at a worse price than seen on bid/ask display. This is due to illiquidity and lack of depth. Some traders use NASDAQ Level 2 quotes to see all the bids and offers on NASDAQ-traded stocks. This isn’t available for stocks traded on pink sheets. Therefore, many investors and traders will place limit orders.
A limit order specifies the exact price at which a trade must be executed. For buys, this can be a price at the current ask or even bit higher (if a trader doesn’t want to get executed at a much higher price) or below the market price if a trader (or an investor for that matter) wants to get a better entry. The drawback is that there’s no guarantee that this set limit will be reached, so a trade may not get executed. Limit orders can be placed for a day, GTD (Good til Date- when a specific date becomes a deadline for execution of a limit), or GTC (Good til Canceled).
Placing trades isn’t complicated, but novice investors make many unnecessary mistakes. Here, while we go deeper into details, we don’t discuss whether a trade is a good bet or not. Instead, the focus of this article is on avoiding technical mistakes as well as on describing features available within the box where orders are placed. We also discuss short-selling orders as well as order limits, stops, qualifiers, and duration.
Basic trade placement errors
When placing a trade, most investors and traders either select a buy or sell order. It is quite simple, but there are cases where a person who wanted to sell, actually buys more. Another mistake is made with regards to quantity. Only a single “0” makes a difference between 100 and 1000 shares.
At times, a person making a trade may actually want to sell all the shares but enters a wrong quantity. For example, there are 1432 shares in the account, but the order is placed for 1423 shares. After the trade is executed, there are 9 shares left in the account. Then, to sell the rest, another trade needs to be placed and commission paid. (Unless you use a broker that doesn’t charge commissions.)
Another potential, and possibly costly, mistake is buying a wrong thing. In the United States, you need to enter a symbol to trade. Make sure you enter the right symbol. These situations are rare but they happen. Always carefully review your order before placing it.
In addition to plain buys and sells, there are short-selling orders. Here, stocks are borrowed from a broker and sold. Later they need to be bought back. The bet is that the price will decline so a profit can be made. To open such a trade, it is necessary to have a margin account. What’s more, the broker you use needs to have shares available for borrowing (and can recall them at any time, asking you to close the trade). Also, there’s an uptick rule, meaning a buy by some other trader needs to be made before you can sell short. Another thing is the inability to sell short most penny stocks, at least at most brokerage houses.
When placing a short sell, you don’t select a “Sell” button. Typically, you’ll need to select “Short sell” option. Then, to close the trade, you select “Buy back to cover” option. Be careful when short selling, the losses are technically unlimited (as there’s no official ceiling on how high a stock price can rise), while the gains are limited since a stock can’t go below zero.