When trading stocks, there can be dozens of different purchase and sale order types. This may come as a surprise to new investors — there are likely even people who have been investing for years without understanding the difference in these actions.
If you are looking to actively day trade, swing trade, or invest, we recommend learning the different types of orders and what they are used for. Read below to become an expert in how to buy and sell stocks the optimal way to become more profitable.
Understanding Bid/Ask Spreads
Regardless of what type of purchase or sale you are looking to make, there has to be a price to execute at. This is going to be based on the stock price itself, which is determined by the bid/ask spread.
The spread is the difference between the highest price a buyer is willing to purchase a stock for vs. the lowest a seller is willing to accept. The difference is made up by market makers, and this completes the full supply-and-demand chain for one security.
As you trade more, you will notice things like how close a bid/ask spread is or how the volume coming in on certain prices represents better liquidity in a stock. This means a stock will be less volatile, which is typically good for most trades.
Using this information, you can see what price a stock is being bought or sold for, and be ready to place any type of order.
Buy Limit Order
For most traders, and especially beginning day traders, this is the type of purchase order we recommend. It is the most controlled and straightforward — you select the security, the amount of shares you want, and the exact price you are willing to bid for it.
There is no guarantee that your order will get filled, but it allows you to be patient in your purchase, and not get the price skewed by a sudden surge in the market. This allows for stress-free trading. Your brokerage will inform you when the stock has dipped to that price, and you will have successfully completed one of the first rules in trading — buy low!
Sell Limit Order
The inverse of a buy limit order, this is a very similar principle but not always the preferred way to sell. Ideally, you would be able to set your limit price based on a smooth spread and price action you can predict. That way, if you followed our first step of buying low, you can turn around and sell high.
However, unlike a limit purchase, there are circumstances that dictate forgoing a limit sale in lieu of preventative or reactive selling. We will get to those soon, but it is still highly recommended to do most of your trading through limit orders.
A market order is used when you need to sell quickly as a reaction to certain price action. Even with software and hotkeys, limit purchase and sales can be missed easily if the price action of a stock is extremely volatile.
This can be if sudden news creates downward selling pressure on a stock you hold, and if you want to buy into a stock that is rapidly rising. A market order goes to the top or bottom (buy vs. sell) of all pending orders, which guarantees you a transaction, but at a cost. This is especially detrimental if the bid/ask is wide; we recommend not using market orders unless you absolutely have to.
Stop-Limit and Stop-Market Sell Orders
These are both used as preventative measures for quick downturns in a position- more commonly known as a stop-loss. This means that if you have 100 shares of a $20 stock, and you are unwilling to hold it in the event it dips below $19, you would set a stop limit sell order at $19. However, this is not always 100 percent effective at guarding your investment, which is where the stop-market sell order comes in.
A stop-market sell is actually a stop limit sale first, that if bypassed (which can happen if there are not enough bidders to fill your limit sell order) will trigger a market sell. This makes it so that if you could not have gotten the $19 price in the above example, you can get the next highest bid to prevent even further losses.
While these are both good safeguards to mitigate loss, there are also some downsides to them. If a stock you are trading is volatile, there might be a known catalyst that triggers a quick spike downward. An experienced trader might then want to not sell at the stop-limit price, but get sold out of the position before it can change.
This isn’t too worrisome of a downside relative to the utility of stop-limit and stop-market sell orders, but like any other action in the stock market, they take some getting used to.
Placing Orders During Market Hours
The stock market trades nearly all hours of the day at this point in time. Depending on your broker, you could actively trade between 4:00 am ET and 8:00 pm ET (Webull has great hours). However, the market technically opens at 9:30 am ET and closes at 4:00 pm ET. Everything else is considered pre-market or after-hours.
This is especially important due to the rules about non-market hour trading. During that time, you can only use limit orders, meaning you must be even more careful with your positions. Additionally, there are no market-makers at that time, so bid/asks can get extremely skewed and lead to strange price fluctuations.
Finally, certain types of stocks may not be available to trade during non-market hours, and as we previously alluded to, not all brokerages allow pre-market and after-hours trading. Before you sign up for a broker, you should check to see what trading hours they allow and if that matches your plan for day trading.
Accelerate Your Trading Education
There are many different ways to purchase and sell securities, but mastering buying and selling via limit orders is the first step. Market orders and stop-losses will be added to your repertoire, and with more experience and learning, you’ll be a pro in no time. StockAbility™ has been accelerating people’s day trading and market education for decades now. If you want to master buying and selling in the optimal fashion along with dozens of other stock market fundamentals, check out our course options today. We’d love to better your financial future.