 Personal Finance PowerPoint Presentation, trading stock. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia, the basics of trading a stock. Know your orders, which you can find online. Take a look at the references, resources, continue your research from there. This by Gene Folger updated May 30th, 2022. Man, I want some coffee. In any case, in prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping the two major formats of investments in mind, fixed income, typically bonds, and then the stocks, the equity types of investments. We're leaning towards looking at the stock or equity types of investments here as we ask the question or look at the basics of trading a stock, know your orders. With the proliferation of digital technology and the internet, many investors are opting to buy and sell stocks for themselves online instead of paying an advisor large commissions to execute trades. However, before you can start buying and selling stocks, it's important to understand the different types of orders and when they are appropriate. So remember just a quick recap here when we're thinking about our investment goals, investment strategies, we first would like to be able to be freeing up some cash. So if we have a large amounts of debt, the question would be, well, should I be paying off the debt or investing? And then once we have the cash freed up, what should we be investing in? Typically a diversified portfolio. How are we going to achieve a diversified portfolio? We may do so by buying stocks and bonds, but we're possibly and probably going to be using tools such as mutual funds and ETF type funds that kind of pool these things together. So keep that in mind. When we're talking about buying individual stocks, then that's going to be something that has its own kind of techniques. So remember, you might be using the strategy of investing in mutual funds to help diversify and you might be looking at buying individual stocks. You might try to do some of both by basically having your mutual funds and possibly having some money set aside that you would like to just be picking stocks, possibly important for enjoyment purposes to be picking individual stocks and doing some trading, keeping in mind the risks involved. Okay, however, before you can start buying and selling stocks, it's important to understand the different types of orders and when they are appropriate. And this article will cover the basic types of stock orders and how they complement your investing style. Market order versus limit order. The two major types of orders that every investor should know are the market order and the limit order. Market orders, where we will start here, a market order is the most basic type of trade. It is an order to buy or sell immediately at the current price. So clearly we've talked about stocks being on the stock exchange, the idea of stocks being a kind of ownership in the corporation, the beauty of them is that they are standard units of ownership and therefore, due to the market trading stocks, we can basically price the stocks or know what the market price is, helping us to set the price and make the trades. And so here we're talking about an order to buy or sell immediately at the current price, what the stock is currently trading for. Typically, if you are going to buy a stock, then you will pay a price at or near the posted ask. If you are going to sell a stock, you will receive a price at or near the posted bid. One important thing to remember is that the last traded price is not necessarily the price at which the market order will be executed. And fast moving and volatile markets, the price at which you actually execute or fill the trade can deviate from the last traded price. So in other words, it takes some time to actually initiate the trade even in a kind of digital system because trades are happening all the time and that market price will fluctuate as the market fluctuates. So the price will remain the same only when the bid ask price is exactly at the last traded price. Market orders are popular among individual investors who want to buy or sell a stock without delay. The advantage of using market orders is that you are guaranteed to get the trade filled. In fact, it will be executed as soon as possible ASAP. Although the investor doesn't know the exact price at which the stock will be bought or sold, market orders on stocks that trade over tens of thousands of shares a day will likely execute close to the bid ask price. So then we have the limit order. So now we're putting as the name implies some limits on the order. A limit order sometimes referred to as a pending order allows investors to buy and sell securities at a certain price in the future. This type of order is used to execute a trade if the price reaches the predefined level. So now looking at a price hitting a level the order will not be filled if the price does not reach this level. In effect, a limit order sets the maximum or minimum price at which you are willing to buy or sell. So for example, if you wanted to buy a stock at $10, you could enter a limit order for this amount. This means you would not pay one cent over $10 for that particular stock. However, it is still possible that you could buy it for less than $10 per share specified in the order. So we got a cap on it in that case. We're not gonna be paying a penny more than $10 but if we can get it for less than $10, then yes, sure, of course, execute the order at that point would be the general philosophy, idea and function. So there are four types of limit orders. We got the buy limit and order to purchase a security at or below a specific price. Limit orders must be placed on the correct side of the market to ensure they will accomplish the task of improving the price for a buy limit order. This means placing the order at or below the current market bid. Sell limit in order to sell a security or above at or above a specified price. So now you're on the selling side of things. And of course, on that side of things, you would like to get the highest price. So to ensure improved price, the order must be placed at or above the current market ask, buy stop in order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been reached, known as the stop level. Buy stop are orders placed above the market and sell stop are orders placed below the market, the opposite of buy and sell limit orders respectively. Once a stop level has been reached, the order will immediately converted into a market or limit order. And then we got the sell stop in order to sell a security at a price below the current market ask, like the buy stop, a stop order to sell becomes active only after a specified price level has been reached, market and limit order costs. When deciding between a market or limit order, investors should be aware of the added costs. So always gotta be keeping in mind those costs. Typically the commissions are cheaper for market orders than for limit orders. So obviously the market order where you're just gonna basically execute the more order as soon as possible, what you would think would be the cheapest type of thing to do when you start putting in complications like limits and so on that could add a bit to the cost. So the difference in commission can be anywhere from a couple of dollars to more than $10. For example, a $10 commission on a market order can be boosted up to $15 when you place a limit restriction on it. When you place a limit order, make sure it's worthwhile. So let's say your broker charges $7 for a market order and $12 for a limit order. Stock XYZ is presently trading at $50 per share and you want to buy it at $49.90. By placing a market order to buy 10 shares, you pay $500, 10 shares times $50 per share plus $7 commission, which is a total of $507. By placing a limit order for 10 shares at $49.90, you would pay $499 plus $12 commission, which is a total of $511. Even though you save a little from buying the stock at a lower price, 10 shares times 10 cents or $1, you will lose it and the added costs for the order, $5 at a difference of $4. Furthermore, in case of the limit order, it is possible that the stock doesn't fall to $49.90 or less. Thus, if it continues to rise, you may lose the opportunity to buy. So obviously if the stock doesn't go down, then you're not gonna execute the order because it never hit the limit or got under the limit. So an additional stock order types. Now that we've explained the two main orders, here's a list of some added restrictions and special instructions that many different brokerages allow and order on their orders. So you got the stop loss order. A stop loss order is also referred to as a stopped order unstop by or unstop sell. This is one of the most useful orders. This order is different because unlike the limit and market orders, which are active as soon as they are entered, this order remains dormant until a certain price is passed at which time it is activated as a market order. For instance, if a stop loss sale order were placed on the XYZ shares at $45 per share, the order would be inactive until the price reached or dropped below $45. The order would then be transformed into a market order and the shares would be sold at the best available price. You should consider using this type of order if you don't have time to watch the market continually but need protection from a large downside move. So a good time to use a stop order is before you leave on vacation, for example. Stop limit order. These are similar to stop loss orders, but as their name states, there is a limit on the price at which they will execute. There are two prices specified in a stop limit order, the stop price, which will convert the order to a sell order and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price or better. This can mitigate a potential problem with stop loss orders which can be triggered during a flash crash when prices plummet but subsequently recover. All or none, that's the AON. This type of order is especially important for those who buy penny stocks. So those are the ones that aren't on the typical exchanges over the counter. So an all or none order ensures that you get either the entire quantity of stock you requested or none at all. This is typically problematic when a stock is very illiquid or a limit is placed on the order. For example, if you put in an order to buy 2,000 shares of XYZ, but only 1,000 shares are being sold and all or none restriction means your order will not be filled until there are at least 2,000 shares available at your preferred price. If you don't place an all or none restriction, your 2,000 shares order would be partially filled for 1,000 shares. So we got the immediate or cancel the IOC. An immediate or cancel IOC order mandates that whenever amount of an order that can be executed in the market or at a limit in a very short time span, often just a few seconds or less be filled than the rest of the order canceled. If no shares are traded in that quote immediate interval, then the order is canceled completely. We've got the fill or kill, that's the FOK. This type of order combines an AON order with an IOC specification. In other words, it mandates that the entire order size be traded and in a very short time period, often a few seconds or less, if neither condition is met, the order is canceled. We got good till canceled, that's the GTC. This is a time restriction that you can place on different orders. A good till canceled order will remain active until you decide to cancel it. Brokerages will typically limit the maximum time you can keep an order open or active to 90 days. Day, if you don't specify a timeframe of expiry through the GTC instructions, then the order will typically be set as a day order. This means that after the end of the trading day the order will expire. If it isn't transacted, filled, then you will have to reenter it the following day. We've got the take profit. A take profit order sometime called a profit target is intended to close out the trade at a profit, what it has been reached a certain level. Execution of a take profit order closes the position. This type of order is always connected to an open position of a pending order. So what's the bottom line with all this stuff? Knowing the difference between a limit and a market order is fundamental to individual investing. So again, you wanna think about your overall investing strategies. You wanna think about, are you buying and selling individual stocks? Are you buying mutual funds? How much are you getting into the day to day kind of perspectives and once you've determined that if you're looking at the trading of the stocks then of course you want to be executing them using the tools at hand to achieve the goals that you've put in place. So there are times where one or other will be more appropriate and the other type of also influenced by your investment approach. A long-term investor is more likely to go with a market order because it is cheaper and the investment decision is based on fundamentals that will play out over months and years. So oftentimes, I'm typically thinking in terms of a long-term type of investor who's not typically trying to beat the market in the short-term and therefore you're probably gonna be using those typical kinds of orders which are gonna be the market orders if you're buying the individual stocks or you might be buying more mutual funds, index funds, ETS. Obviously if you're doing more stuff on the short-term then you might be trying to take advantage or get some short-term gains then you might be using a lot more of the tools to help you to do so. So the current market price is less of an issue. So a trader, however, is looking to act on a short-term trend in the charts and therefore is much more conscious of the market price paid in which case a limit order to buy in which a stop-loss order to sell is usually the bare minimum for setting up a trade. By knowing that each order does and how each one might affect your trading you can identify which order suits your investment needs saving you time, reducing your risk and most importantly saving you money.