Trading ETFs: Basic Order TypesPosted 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.|