Investors who understand trading terminology increase their ability to make efficient transactions. Being a smart investor means using the tools that best fit your needs for executing transactions and risk management.
The following trading terms are common and available on most, if not all, trading platforms and accounts, including online trading.
This is the price a buyer(s) is currently willing to pay for a security. There is a bid size attached to the bid which is the number of shares the investor(s) are currently willing to buy at that price.
The price a seller(s) is currently willing to offer or sell a security. There is an ask size attached to the order(s) which is the number of shares the investor(s) are currently willing to sell at that price.
The difference between the bid and ask price. In efficient markets with high volume the spread should be very small. In thinly traded markets the bid/ask spread could be very large; in which case investors should beware of being ripped off. Question buying any investment with a large bid/ask spread.
A market order will be executed at whatever price is available when the order is executed. Market orders have first priority; they will be filled (executed) before other types of orders. Market orders guarantee execution and carry little risk in securities that are traded heavily on major stock exchanges. Market orders may be dangerous in thinly traded securities where the bid/ask spread could be large.
A limit order guarantees a certain price (or better), but does not guarantee execution. A limit order will not be executed unless the limit price stipulated (or better) becomes available.
A buy limit order can only be executed at or below the limit price. A sell limit order can only be executed at or above the limit price.
A stop order is an order that sets a price level, which if reached, will trigger a market order for execution. A stop order, also known as a stop loss order, is a risk management trading tool.
A sell stop order would be placed below the current price. For example, you buy XYZ Inc. at 100 and place a sell stop order at 90. If XYZ trades at 90 or below, your order will become a market order and it will be filled at the price available at that time.
A buy stop order would be place above the current price. For example, you are short (see below) XYZ Inc. at 100 and place a buy stop order at 110. If XYZ trades at 100 or above, your order will become a market order and it will be filled at the price available at that time.
Stop Limit Order
A stop limit order is a combination of the stop order and limit order. The stop limit order sets a specific stop price, which if reached, will trigger a limit order for execution. This allows the investor to control the execution price but carries the risk that the order will not be executed because the limit price is not available.
A sell stop limit order would be place below the current price. For example, you buy XYZ Inc. at 110 and place a sell stop limit order at 90. If XYZ Inc. trades at 90 (or below) your stock will be sold only if a price of 90 (or better) becomes available.
A buy stop limit order would be placed above the current price. For example, you are short XYZ Inc. at 100 and place a buy limit order at 110. If XYZ trades at 110 then it will trigger a limit order in which your shares will be sold if and when a price of 110 or better becomes available.
In addition to the above an investor can stipulate conditions on the duration of the order. Unless stipulated the Day Order is the default duration.
Day Order – If the order is not filled during the trading day it will be cancelled.
Good Until Cancelled (GTC) – The order will be open for execution until the investor cancels.
Fill or Kill (FOK) – If the entire order cannot be filled immediately, it is cancelled.
Fill and Kill (FAK) – Similar to FOK except it can be partially filled. Any parts not filled immediately are cancelled.
Cancel or Change Orders
Allows a trader to cancel or change current open orders.
Understanding Trading Execution Terminology
Now that you understand trading terminology; you are able to use the tools available to you as an investor. Use them to make efficient transactions and apply risk management strategies to your stock market trading orders.
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