Market, Limit, Stop, & Stop Limit Orders Explained. Investing for Beginners Series #8 david moadel
welcome to looking at the markets with David Modell today I would like to
explain to you a number of types of orders market orders limit orders and a
couple of other ones including stop orders and stop limit orders when you
buy or sell shares of a stock you might be asked what type of order you want to
place the most popular types of orders are market orders and limit orders
sometimes you might also have other choices such as stop orders or stop
limit orders I'm using terms according to the broker Schwab the terms might be
different for you depending on which broker you're using market orders are
the easiest type of order to make you basically just hit the buy or sell
button and your order will usually get filled immediately there's no thinking
or math involved this sounds great until you understand that you're probably not
going to get the best available price in other words you could get ripped off a
little bit or more than a little bit with a market order you're basically
just telling the market fill my order immediately and give me whatever price
you think is right it's kind of like buying a used car and just handing a
blank check to the used car salesman and saying just give me the car quickly and
charge me whatever price you think is appropriate when you use a market order
you're not setting any limits I believe that if you're going to haggle and get a
good price you've got to set some boundaries or limits as to what you will
and will not accept that leads us to the next type of order limit orders with
limit orders you're establishing a limit price the price that you specify at
which you'll buy or sell shares of stock only at that price or better if you use
a limit order to buy shares your order will only execute at or below your limit
price if no one is willing to sell shares to you at that price or below
your order simply won't get if you use a limit order to sell shares
your order will only execute at or above your limit price if no one is willing to
buy shares from you at that price or higher your order simply won't get
filled so limit orders require some thinking and they have some risk that
your order won't be executed however at least you'll get at least you won't get
ripped off with an unfavorable or unexpectedly bad price stop orders and
stop limit orders are more complex but they're worth learning about with stop
orders you will need to provide a number which is your stop price if the price of
the stock reaches that stop price which you provided the broker will enter a
market order then just as with any market order your order will probably
get filled immediately but at whatever price the market decides to give you
which might be an unfavorable or unexpected price if you buy shares with
a stop order it will turn into a market order if the stock trades at or above
the stop price which you provide if you sell shares with a stop order it will
turn into a market order if the stock trades at or below the stop price at
which you provide some people use this method to create a stop-loss order and
if you don't know what a stop-loss order is right now don't worry about it that's
a separate lesson because the stock price might not reach your stop price
there is the risk that your order will not be executed with stop limit orders
you will need to provide two numbers the first number is your stop price if the
Spry if the price of the stock reaches or passes that stop price which you
provided the broker will then enter a limit order that's why you have to enter
the second number which tells the broker what price you're willing to buy or sell
the stock at and that's the limit price it's kind of like this if the stock
price reaches or passes blank create a limit order in which I'll buy
or sell sell shares at blank or better if you buy shares with a stop limit
order you provide a stop a price and if the stock trades at or above that stop
price the broker will then create a limit order to buy at a particular price
which you must specify or better in other words you're entering two numbers
first your stop price and then your limit price all right what if you're
selling shares with a stop limit order well if you sell shares with a stop
limit order you provide a stop price and if the stock trades at or below that
stop price the broker will create a limit order to sell at a particular
price which you must specify or better and that's your limit price I believe
that this is an effective method of creating a stop-loss order I believe
it's more effective than just a stop order because a stop order if it reaches
a certain price becomes a market order and so then the price is kind of out of
your control as it is with market orders generally with a stop limit order at
least both prices are totally controlled or specified by you both the stop price
at which the order would get triggered and then the limit price at which you're
willing to buy or sell at that price or better once again because the stock
price might not reach your stop price there is the risk that your order will
not be executed and this is true the possibility of your order not getting
filled that's true with all the types of ordered we order as we mentioned today
except for just plain old market orders which we spoke about at the beginning
with a market order you're going to get filled immediately or or at least very
very quickly in most cases if there are enough shares being traded
but again you're probably not going to get a very favorable price you might get
a reasonably favorable price if there's plenty of shares being traded like with
Apple stock for example the you know you'll probably still get a pretty good
price with a market order all right but even
with Apple or something like that in which there is a lot of volume a lot of
shares traded I'll still probably put in at least a limit order because I'm going
to set my boundaries I'm not going to personally I'm not going to in most
cases allow the markets to decide what price I'm going to get and I'm willing
to take the chance of my order not being filled because I I don't put myself in
positions where I'm desperate to fill an order and that's why I use limit orders
oftentimes I'll use limit orders to buy and to sell but if I want to create a
stop-loss order then it will probably be a stop limit order so that lets say I
buy shares of Apple let's say Apple stock all right I might use a limit
order to do that and that way I'll get filled at my price now let's say if I'm
using stop-loss orders and again if you don't know what a stop-loss order is
then you don't have to listen to this part of the video and let's say I'm
putting in a but if I do want to create a stop-loss order then I'll probably
make it a stop limit order alright and once again with stop limit orders I'm
creating I'm entering two prices the first one is telling the broker if Apple
should go down to this particular price now create a limit order and the second
value the second price that I'm entering or providing to the broker is saying
okay only sell my shares of Apple stock at this limit price the second number
that I more than I'm entering only sell my shares of Apple stock at this price
or better meaning this particular price that I'm
providing or higher all right that way my loss is truly are limited I'm not
allowing the stock price to just go down and down until you know until I get a
really horrible price and and then I'm giving away my shares of Apple stock for
a very very low price all right yes it is true that stop limit orders
are the most complex ones you have to enter two numbers two prices but once
you get used to it it starts to make more sense and so if you have a broker
that allows you to pay per trade or virtual trade you can try it out with
that and you can get used to it until it becomes more natural and easier for you
if you're just starting out and you're trading or investing in stocks with
plenty of volume lots of shares bought and sold on a daily basis then you might
just want to start with market orders I suppose because it's the easiest but
even then you know what even if you're a beginner you should at least be able to
handle limit orders so you can get used to it and you can have some control over
where you buy it where you sell it that kind of thing all right and if you are
willing to learn about stop orders or better yet stop limit orders because
again with stop orders you're really entering a market order if it reaches a
certain price and I'm not a huge fan of market orders in most kit in most
instances then I believe it's worth your time to learn about stop limit orders
now again these are terms used by Schwab the terminology and the definitions
might be different depending on which broker you're using okay so my name is
David Modell and my email address is David Modell at gmail.com if you have
questions if you want help with these things you know the first the first
people to help you really should be the broker that you're working with and you
know to tell you exactly what terminology they're using and what the
definitions mean but if you just want general help you can contact me anytime
my email address is David Modell at gmail.com I
can also help you to put together a trading or investing plan and just to
help you with buying and selling stocks and things like that if you like this
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you