How the order you use can increase your investment returns

//How the order you use can increase your investment returns

 

borkernewI am sure, especially if you use an internet based stock broker, you have seen or used some of the different types of orders you can choose from.

But do you know what they all mean? And do you know that they can also increase your returns by giving you a lower purchase and a higher selling price?

Below is a quick overview of the different order types and how you can optimally use them.

Easy to understand

Even though the terms may sound odd at first don’t worry they are all very easy to understand once you have worked through an example.

 

Market Order

This is the simplest and the quickest order to execute.

When you give a market order your broker will sell or buy a stock at the current market price, whatever it may be.

Depending on the market conditions, your order may not always get executed at the price you think it will.

For example, if there is a lot of volume traded, you may get a price close to the last price when you give your order.

Be careful

Be careful though as market orders may move the stock price substantially if the volume of your order is high compared to what is traded at the time (for example with some of the smaller companies recommended in the newsletter).

Only use it when

You should thus use this type of order only when you desperately want to buy or sell a security regardless of the price or if your order volume is small compared to the volume traded in the market.

Gives you no control

A market order gives you as the buyer or seller no control over the price but it will ensure that your order gets executed if there is enough volume to do so.

I only use market orders when buying very large market value companies, where the amount of shares I want to trade is only a small fraction of the daily volume.

Low cost as easy to execute

In terms of brokerage costs market orders are the most inexpensive type of orders you can place because your broker does not have to go to much trouble to get them executed.

 

Limit Orders

These types of orders are as popular as market orders; however, they have a major advantage because they let you control the price at which the order is executed.

As the name suggests, with a limit order, you tell your broker to buy or sell the security at a maximum or minimum price.

Only be executed when

The order will only be executed if the price is within the limit you have set.

For example, if you set a buy limit order for €50 but the current market price of the stock is at €60, the order will not be executed unless the price drops by €10 to €50.

Control your buy and sell price

Limit orders can thus be used to control the buy and sell prices of your investment.

May cost a bit more – worth it

Note that you may need to pay a slightly higher commission when you place a limit order. But if the volume traded in the company is low it is always worthwhile.

But your order may not be executed

But you must remember that with a limit order your order may not get executed is the price you set is not reached.

For example you set a sell limit order at €40 and the current price of the stock is €30. If the price does not reach the limit you set or higher, your order will not be executed.

Similarly a buy limit order will only be executed at the limit price or lower.

Limit order variations

It is also possible to further restrain buy and sell limit orders.

This can be done with a FOK (Fill or Kill) and an AON (All or None) orders.

Execute or cancelled

When you place a FOK limit order, it will either be executed in full or cancelled (executed in full here means buy the number of shares you ordered).

All or nothing

On the other hand an AON limit order will only be executed in full.

This means that you will either buy or sell the complete number of shares you ordered or the order will not be executed.

If the order cannot be executed it will not be cancelled (as is the case with a FOK order) but will be held for later execution up to the date of the order’s expiry.

Use AON when

The AON is a very good type of order to use when you are buying or selling illiquid shares (as some of the small companies the newsletter recommends).

It will avoid multiple transactions of a small number of shares that can be very expensive in terms of brokerage.

Not always available

Unfortunately this type of order is not available from all brokers and at all stock exchanges.

 

Stop or Stop Loss Orders

Stop orders can be placed when you are buying or selling shares.

Used to limit losses

They are used to either buy a share or sell if a certain price is exceeded. They are however mainly used to limit your losses by protecting you from a big drop in the price of a stock.

With a stop loss order, you tell your broker to sell a share if it falls below a certain price.

Below the market price

Stop loss orders are generally set below the current market price. Which means if the price later falls to this price, the broker will execute your stop loss order.

For example you own a share, currently trading at €40 per share and want to limit your losses by selling it if the price falls to €30. You would then place a stop loss order at €30. This means as soon as the share price falls to €30 your broker will automatically sell the share.

Important – Becomes a market order

It’s important for you to keep in mind that when triggered your stop loss order becomes a market order and it will be executed at the current market price.

For example when you use a sell stop loss order, you are instructing your broker to sell the security at the best available price when the stop price has been reached (see Market Orders above).

If the price of a stock stays above the stop price you set the stop loss order will not be executed.

Alternatively, you can also use the buy stop order (below the current market price) to take advantage of a declining market so you can buy a stock once a certain lower price has been reached.

 

Stop limit order

This type of order combines the features of a limit as well as a stop order.

When stop is reached limit order triggered

Once the stop price is reached; instead of a market order (like in case of normal stop orders), the stop limit order turns into a limit order.

This means that the security is bought or sold at no more or less than your specified limit price.

This type of order is a good choice when placing stop loss orders for illiquid shares.

But may not be executed

Be careful if you want to use this type of order to limit losses, because if the stock price has fallen enough to exceed your stop price it may also have fallen past your limit price.

This means your stop limit order will not be executed.

 

Trailing Orders or Trailing Stop Orders

Like the name suggest, a trailing order is essentially a stop order where the stop price is not fixed.

Stop price a percentage change

A trailing stop order is thus similar to the regular stop orders but the stop price which is set as a percentage change from the price of a security.

This means if the price of a share were to fall by 10%, the order will be triggered. A trailing stop order can thus be very effectively used to protect your profits.

If you have a profit on a position you can use the trailing order to follow the price of the security. If the market value of the stock declines by a percentage you specified, the trailing stop order will become a market order (see market order above) and will be executed.

On the other hand, if the price continues to rise the trailing order will follow it and allow you to participate in further gains.

 

Trailing stop limit order

This type of an order combines the features of both the trailing order and the limit order.

Instead of becoming a market order when triggered a trailing stop limit order becomes a limit order (see limit order above).

Day order

You would use this type of order if you want to only have your order to be valid for one day.

Your order will thus be cancelled when the market closes.

 

Good –Till-Cancelled-Order (GTC)

This type of an order can theoretically be in force indefinitely; however your broker may set a limit on such orders for example 90 days.

As the name suggests, these orders are in effect until you cancel it.

 

Immediate-or-cancel order (IOC)

This type of order is either executed immediately or cancelled.

However, unlike fill or kill orders an IOC order can be partially executed.

 

Market on Close and Market on Open (MOC & MOO)

These types of orders will ensure that you get the open or close price (or close to it) respectively on the day for which you place the order.

 

One cancels the other order (OCO)

This type of order is used if you have two orders in the market but you only want one of them to be executed.

The execution of the one order will automatically cancel the other order.

Here is an example.

If you are invested in Microsoft at $20 a typical OCO order would be a stop loss order at $15 and a sell limit order to take a profit at $27. If one of the orders is executed, the other is automatically cancelled.

 

As you can see that are a lot of order types what give you quite a lot of opportunities to limit losses, lock in gains and give you a better buy or sell price.

The first step you should take is to look at what order types your broker offers and how they are defined. This is important as the exact nature of an order may differ slightly from broker to broker.

Once you have learned what is available start using them to your advantage.

By | 2017-05-21T07:19:02+00:00 December 2nd, 2013|