When you trade stocks, you can use one of the 5 following types of orders:

1. Market Orders. Use a market order when you want to get in or out of the market, no matter what. It lets you get in or out at the best market price, using the nearest bid or ask (buy price or sell price) at that moment. Do not use a market order in a thinly traded market, especially one that isn’t trading actively, since there may be no one to match your order with, and this leaves you open to dangerous consequences.

It is important to remember that you do not control the price you will buy at, but normally you have a pretty good idea. Avoid this kind of order when there are few buyers and sellers.

2. Limit Orders. Limit orders are like market orders, except you specify a price. This means you can “buy 100 shares at 30″ and be sure that if your order is filled, you will get it at 30 or better. This is good when you need a certain price to ensure profits, or the market is choppy, and you want to ensure you get filled at a good price.

Sometimes your broker will charge a bit more for limit orders, since they can often remain unfilled, and it requires more of their time to monitor and process the order.

3. A stop order. This is an order that says “do not do anything unless this happens…”, so on a stop-limit normally you set it to sell your shares if it hits a certain low. In rare cases, people use stop buy orders, but they can be very dangerous. One your criteria is met, your order is executed at the market (no set price).

4. A stop-limit order. This is just like the stop order, but with a set price. For example, you set a stop limit sell on IBM at 100. IBM drops to 100, and your “sell at 100″ order is activated, but if IBM drops to 99 and continues to drop, your order may never be filled.

5. A trailing stop order. This is an order that is dependent on the current prices. Usually it is used to lock in profits after some have been made, while letting you ride the trade for even better profits. For example, a trailing stop at 10 below market means if the stop ever drops 10 from its most recent highs, your market order to sell will be activated.

These order types are essential when you’re mastering market stock trading, because the order type will control how much money you make.

Simply put, some orders perform better than all the others in a certain market condition. For example, in October 1987 (Black Monday), stop limit orders caused many people to get caught with huge loses on their hands.

To master the order types and knowing when to use each type, you should practice paper trading without real money, until you understand how the order types operate, and how they affect profitability.

Once each order type becomes second nature to you, you can switch to a real trading account with real money, and trade with confidence, knowing you have mastery over all the order types.

It does not take very long at all to master these five order types, and once you know it, you can apply it for the rest of your trading career, and become a powerful force in the online trading world.

    Posted in Stock market from Investor on 27. Aug. 2008