Loading...

The pros and cons of investment orders

April 21, 2024
22
83
0
Fred Babu
Author
Fred Babu

Market orders, limit orders & stop orders are common order types used to buy or sell an investment.

 

An order is a set of instructions that you provide your broker (either traditional or online) in order to execute a trade (buy or sell)

 

There are several different types but the most common are:

- Market
- Limit
- Stop Loss
- Stop Limit 

 

A market order instructs your broker to buy/sell at the next available price.

This makes sense if you like where the stock is currently trading and you're not looking for a particular price to either buy or sell at

This is the simplest order.

 

A limit order instructs your broker to trade at a certain price OR BETTER.

If you don't "get" the limit price or better, the order does not go through.

Example

Buy ABC @ 18 limit. The stock price would have to be R18 or LOWER for it to go through.

A limit order is solid if you want to buy/sell at the limit price or better.

Keep in mind there is a chance the order won't go through if:

- the limit price is not reached 
- there are people ahead if you in line with the same order

 

A stop loss order is "triggered" once the 'stop price' is met.

Once the price is met, it turns into a market order.  (Trade @ next available price)

Example: 

Buy ABC @ R20 stop. Once price reaches R20, you'll likely get the next market price. Could be over or under R20.

 

Stop loss orders are placed to either protect gains/limit losses.

If the stock price does not hit the stop loss, the order does not get triggered.

And if it is triggered, you'll get whatever the next available market price is (may be above or below the stop loss)

 

Stop limit orders are a mix between a stop order and a limit order.

Once the stop price is met, it turns into a limit order.

Example: 

Sell ABC at 150 stop, 155 limit. (Order is triggered if ABC hits 150 but only goes through if sold at 155 or higher)

 

The order has an even lower chance of going through because of two things have to happen:

- stop prices must be met
- has to trade @ a limit price or better

This order gives you the most control over what price your trade through at though

 

Even if you're not a very active trader, it still helps to get an idea of these different types of orders.

Each has it's pros and cons that you should consider as a part of your portfolio strategy.

I hope this helps.


Related Tags:
2 min read
Share this article:

Related Articles

All articles
Top