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Trading ETFs: Basic Order Types
Posted 08/24/2009, 9:00 am EST by Staff from ETFguide.com
Since exchange-traded funds (ETFs) are bought and sold just like stocks it�s important to be familiar with the fundamentals of order placement.
When buying or selling an ETF, the quality of your trade�s execution will be impacted by the type of order you place. A clear understanding of various order types will help you to achieve the results you want.
Here are some of the advantages and disadvantages of each order type.
| Type of Order | Definition | Advantages | Disadvantages |
|---|---|---|---|
| Market | An order to buy or sell an ETF at the market�s current best available price. | Typically ensures immediate execution. | Order may get filled at different prices and times, especially in fast moving markets. |
| Limit | An order to buy or sell an ETF with a restriction on the maximum price to be paid or the minimum price to be received. Also known as the �limit price.� | If filled, your order will only be executed at your specified limit price or better. | No assurance of order execution. |
| Stop | An order to buy or sell an ETF at the market price once the ETF has traded at or through your specified price. Also known as the �stop price.� | Designed as an automatic trigger for an order entry or exit once a certain price level has been achieved. | Order may get filled at a much higher or lower price than the ETF�s price, especially in fast moving markets. |
| Stop Limit | Combines a stop order and a limit order to buy or sell an ETF at a specified limit price (or better) only after the stop price has been reached. | If filled, your order will only be executed at limit price or better. Also provides an order entry or exit threshold. | No assurance of order execution. |
| Short Sale | A trade that involves selling an ETF you do not own because you expect to purchase it back later at a lower price. | A decline in the ETF�s price provides the potential for a profit. | An increase in the ETF�s price could force you to buy it back at a substantially higher price you sold it for, resulting in a loss; your account will accrue margin interest for the amount of time the ETF is borrowed. |