Orders you place with your stockbroker neatly fit into two categories:
1) Time-related orders
2) Condition-related orders
Get familiar with both orders, because they’re easy to implement and invaluable tools for wealth building and (more importantly) wealth saving! Using a combination of orders helps you fine-tune your strategy so that you can maintain greater control over your investments. Speak with your broker about the different types of orders you can use to maximize the gains (or minimize the losses) from your stock investing activities. You also can read the broker’s policies on stock orders at the brokerage Web site.
Time-related orders
Time-related orders mean just that; the order has a time limit. Typically, investors use these orders in conjunction with conditional orders. The two most common time-related orders are day orders and good-till-canceled (or
GTC) orders.
Day order
A day order is an order to buy a stock that expires at the end of that particular trading day. If you tell your broker, “Buy BOA, Inc., at $37.50 and make it a day order,” you mean that you want to purchase the stock at $37.50. But if
the stock doesn’t hit that price, your order expires at the end of the trading day unfilled. Why would you place such an order? Maybe BOA is trading at $39, but you don’t want to buy it at that price because you don’t believe the stock is worth it. Consequently, you have no problem not getting the stock that day.
When would you use day orders? It depends on your preferences and personal circumstances. I rarely use day orders because few events cause me to say, “Gee, I’ll just try to buy or sell between now and the end of today’s trading action.” However, you may feel that you don’t want a specified order to linger beyond today’s market action. Perhaps you want to test a price. (“I want to get rid of stock A at $39 to make a quick profit, but it’s currently trading at $37.50. However, I may change my mind tomorrow.”) A day order is the perfect strategy to use in this case.
If you make any trade and don’t specify time with the order, most (if not all)
brokers automatically treat it as a day order.
Good-till-canceled (GTC)
A good-till-canceled (GTC) order is the most commonly requested order by investors. Although GTC orders are time-related, they’re always tied to a condition, such as when the stock achieves a certain price. The GTC order
means just what it says: The order stays in effect until it’s transacted or until the investor cancels it. Although the order implies that it can run indefinitely, most brokers have a limit of 30 or 60 days (or more). By that time, either the
broker cancels the order or contacts you to see whether you want to extend it. Ask your broker about his particular policy.
A GTC order is usually coupled with conditional or condition-related orders. For example, say that you want to buy BOA. stock but you don’t want to buy it at the current price of $48 per share. You’ve done your homework on the stock, including looking at the stock’s price-to-earnings ratio, price-tobook ratio, and so on (see Appendix B for more on ratios), and you say, “Hey, this stock isn’t worth $48 a share. I’d only buy it at $36 per share.” You think the stock would make a good addition to your portfolio but not at the current market price. (It’s overpriced or overvalued according to your analysis.) How should you proceed? Your best bet is to ask your broker to do a “GTC order
at $36.” This request means that your broker will buy the shares if and whenthey hit the $36 mark (or until you cancel the order). Just make sure that your account has the funds available to complete the transaction. GTC orders are very useful, so you should become familiar with your broker’s policy on them. While you’re at it, ask whether any fees apply. Many brokers don’t charge for GTC orders because, if they happen to result in a buy (or sell) order, they generate a normal commission just as any stock transaction does. Other brokers may charge a small fee.
To be successful with GTC orders, you need to know
1. When you want to buy: In recent years, people have had a tendency to rush into buying a stock without giving some thought to what they could do to get more for their money. Some investors don’t realize that thestock market can be a place for bargain-hunting consumers. If you’re ready to buy a quality pair of socks for $16 in a department store but the sales clerk says that those same socks are going on sale tomorrow for only $8, what would you do — assuming that you’re a cost-conscious consumer? Unless you’re barefoot, you’re probably better off waiting.
The same point holds true with stocks. Say that you want to buy MS, at $26 but it’s currently trading at $30. You think that $30 is too expensive, but you’re happy to buy the stock at $26 or lower. However, you have no idea whether the stock will move to your desired price today, tomorrow, next week, or even next month (maybe never). In this case, a GTC order is appropriate.
2. When you want to sell: What if you bought some socks at a department store, and you discovered that they have holes (darn it!)? Wouldn’t you want to get rid of them? Of course you would. If a stock’s price starts to unravel, you want to be able to get rid of it as well. Perhaps you already own MS (at $25, for instance) but are concerned that market conditions may drive the price lower. You’re not certain which way the stock will move in the coming days and weeks. In this case, a GTC order to sell the stock at a specified price is a suitable strategy.
Because the stock price is $25, you may want to place a GTC order to sell it if it falls to $22.50, to prevent further losses. Again, in this example, GTC is the time frame, and it accompanies a condition (sell when the stock hits $22.50).
Condition-related orders
A condition-related order means that the order is executed only when a certain condition is met. Conditional orders enhance your ability to buy stocks at a lower price, to sell at a better price, or to minimize potential losses. When stock markets become bearish or uncertain, conditional orders are highly recommended. A good example of a conditional order is a limit order. A limit order may say, “Buy Google at $45.” But if Google isn’t at $45 (this price is the condition), then the order isn’t executed.
Market orders
When you buy stock, the simplest type of order is a market order — an order to buy or sell a stock at the market’s current best available price. It doesn’t get any more basic than that. Here’s an example: AIG ., is available at the market price of $10. When you call up your broker and instruct him to buy 100 shares “at the market,” the broker will implement the order for your account, and you pay $1,000 plus commission. I say “current best available price” because the stock’s price is constantly moving, and catching the best price can be a function of the broker’s ability
to process the stock purchase. For very active stocks, the price change can happen within seconds. It’s not unheard of to have three brokers simultaneously place orders for the same stocks and get three different prices because of differences in the broker’s capability. (Some computers are faster than others.)
The advantage of a market order is that the transaction is processed immediately, and you get your stock without worrying about whether it hits a particular price. For example, if you buy AIG, with a market order, you know that by the end of that phone call (or Web site visit), you’re assured of getting the stock. The disadvantage of a market order is that you can’t control the price that you pay for the stock. Whether you’re buying or selling your shares, you may not realize the exact price you expect (especially if you’re buying a volatile stock).
Market orders get finalized in the chronological order in which they’ replaced. Your price may change because the orders ahead of you in linecaused the stock price to rise or fall based on the latest news.
Stop orders (also known as stop-loss orders)
A stop order (or stop-loss order if you own the stock) is a condition-related order that instructs the broker to sell a particular stock only when the stock reaches a particular price. It acts like a trigger, and the stop order converts to
a market order to sell the stock immediately.
The stop-loss order isn’t designed to take advantage of small, short-term moves in the stock’s price. It’s meant to help you protect the bulk of your money when the market turns against your stock investment in a sudden manner.
Say that your AIG, stock rises to $20 per share and you seek to protect your investment against a possible future market decline. A stop-loss order at $18 triggers your broker to sell the stock immediately if it falls to the $18 mark. In this example, if the stock suddenly drops to $17, it still triggers the stop-loss order, but the finalized sale price is $17. In a volatile market, you may not be able to sell at your precise stop-loss price. However, because the
order automatically gets converted into a market order, the sale will be done, and you prevent further declines in the stock.
The main benefit of a stop-loss order is that it prevents a major decline in a stock that you own. It’s a form of discipline that’s important in investing in order to minimize potential losses. Investors can find it agonizing to sell a stock that has fallen. If they don’t sell, however, the stock often continues to plummet as investors continue to hold on while hoping for a rebound in the price.
Most investors set a stop-loss amount at about 10 percent below the market value of a stock. This percentage gives the stock some room to fluctuate, which most stocks tend to do on a day-to-day basis.