Essentially, when investors purchase shares in a company through an investment bank or broker, they request that the bank or broker carry out a “stock order.” An investor might want to purchase 100,000 shares of Samsung Electronics. The stock order will spell out this exact number and type of purchased stocks.
Before any transaction can occur, there must be money in the buyer’s account. If there is not enough money to cover the cost of what is being requested, then the order will not go through. Additionally, certain restrictions may be on what can be done with different stock orders. These restrictions are usually based on whether or not an individual already has an existing holding in that particular company’s stocks.
A market order does not specify a maximum or minimum price but goes through at the best available price. It’s useful when investors need to quickly get in and out of stock and hope it doesn’t become too volatile.
A limit order is an agreement between buyer and seller that specifies the maximum or minimum selling price. For example, someone could place a limit sell order for HKD 5.20 per share even if the current selling price on the market for this security was HKD 5.15 per share. If someone else wants to purchase 100 shares at HKD 5.20 per share, it will be sold.
A limit buy order is like a market order in that it does not specify a minimum price but will go through at the best available price. It differs from a market buy-in in that the investor wants to pay no more than a specific maximum price or limit for this stock.
For example, if Apple shares traded at HKD 100 per share and someone placed a limit buy order for HKD 95 when the stock rose above HKD 95, it would automatically be purchased. It can also refer to an options contract giving one the right but not obligation to buy 100 shares at some predetermined price and date.
A stop-loss order is an instruction to sell a security once the price reaches a certain level, which helps take advantage of existing gains and limits downside risk. The investor might want to use this type of stock order if they have decided that the current market price for a particular stock or other asset has risen high enough, and it seems like a good time to secure profits.
When placing this kind of stop-loss sell order with their broker, an investor would also need to specify a “trigger price.” This price is used as the basis from which the stock’s decline will be measured. For example, if Apple shares traded at HKD 100 per share and someone placed a stop-loss sell order for HKD 99 when the stock fell to HKD 99, they would automatically be sold.
Why use stock orders?
A common reason an investor may prefer certain types of orders may be to keep the price as low as possible. They would be looking at stock indices and be more concerned with overall costs instead of only getting the lowest prices now.
Another good reason for considering these different orders is making sure that you don’t pay more than what the asset is worth in market value. This is why you might want to use limit and stop-loss orders and the others. Other reasons for using different stock orders include ensuring that you don’t lose too much or make too little and maximizing your profits.
The bottom line
Stock orders are types of trade requests that you can ask your broker about, but it’s essential to consider that not all brokers will have access to what you need. Since there are different restrictions based on where you purchase these shares, it would be wise to do the necessary research beforehand so as not to miss out.