Today's stock market is not like the market of the good old
days. In the 90s, you would put your money in the market and just
watch it grow. Not so any longer. Over the last ten years, the
S&P 500 is essentially flat.
Today, you have to fight for every percent, and using the
appropriate buy or sell order will help you do just that. Let's
take a look at the various types of stock orders, and when it's
best to use each one.
The standard, default order is called a market order. This simply
means that your trade will be executed at the current market price.
Market orders are generally executed immediately at the best price
offered by a market maker, a firm that is quoting a buy a sell
price for stock. The market maker is required to offer shares for
purchase and sale at a price of its choosing. For investors buying
large blocks of shares, it is important to note that a market maker
guarantees to buy or sell only a certain number of shares at a set
price (this could be anywhere between 100 and 5,000 shares).
A market order to buy or sell is an instruction to your broker
to transact at the prevailing price at the time of execution. For
small caps with low volatility, the market order is an easy one to
place. However, with more volatile stocks, you might get some
unexpected surprises upon execution. Use market orders if you must
buy or sell a stock immediately and the execution of the trade is
more important to you than the price of the transaction. This can
be important when you're trying to buy a stock that is running
higher and are confident that you need to own the stock, even if
the trade execution may be at a higher price. Likewise, if a stock
is falling quickly due to bad news, use of a market sell order to
exit a position can be prudent.
But in most circumstances, using market orders is not advisable,
since the price of a small-cap stock tends to be more volatile than
their large-cap cousins, primarily due to lower liquidity. Instead,
I recommend using limit orders (see below) to narrow down the
specific trade you would like, and at an exact price. While these
trades don't get executed as quickly as a market order, you'll have
the assurance that the trade will be made at your desired price (if
it is executed).
When you place a limit order, you state the exact price at which
you want to make a purchase or sale. The order will only be placed
if that price is available. This is a smart way to buy and sell
small caps, because you set and control the price; if the market
price varies from that level, the buy or sell order will not go
through. However, limit orders are not effective if you want to
make the trade
, since the trade may not be executed.
At or better.
This is a variation on limit orders. In the usual limit order, the
trade is triggered once the specified price is reached, even though
the actual trade value may be higher or lower. This varies by
brokers' definitions of the limit itself. Some traders use at or
better as part of the order. Thus, a buy order will be executed at
or below the limit price, and sell orders will be executed at or
above the limit price.
As the name suggests, the stop-loss order is used to limit losses.
This order includes a price trigger that generates a sell if the
stock falls to a specified price level. When shares fall to the
prescribed price, a market order to sell the stock is executed.
This may mean that the trade is executed at the stop-loss price, or
below that price in a fast moving market. This is a wise form of
protection when you are in a highly volatile market, and especially
if the market risk and volatility levels for your stock are higher
than average. You pick the stop-loss price knowing that the stock
is going to be sold when that price is triggered. This order is
best used to protect downside exposure by limiting potential losses
from your stocks. With small caps, you must be careful, as the
volatility could "stop out" a position based on intra-day
volatility. Therefore, use these cautiously, and set them at a
price at which you'll definitely want to sell the stock. For
hands-on investors watching the market, stop losses are less
useful, since you're always watching your positions.
A useful variation on the stop-loss order is the trailing stop. In
this situation, you are preserving paper profits rather than
limiting losses. In cases where your small-cap stock has
appreciated, a trailing stop is a smart order to have in place. The
order represents a fixed percentage of the current market price. If
the price falls by that percentage or more, the trailing stop
becomes a market order and a sell is placed. But if the stock's
price continues on its upward rise, the trailing stop continues in
force without any action. It only goes into effect if the price
falls from a high point to the percentage set in your standing
order. Like the risks of a stop loss, this can cause problems for
small-cap investors. If a stock rises quickly, and then falls back
from a high price, the shares would be sold using a trailing stop.
The concern here is that your broker could automatically sell a
stock you wish to continue owning.
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is filled with every tip and trick I know about investing in
small-caps, and I think it's absolutely vital to anyone interested
in the topic. There is a ton of great information in the book, and
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