You’d think knowing how to place orders was easy, right? I mean all we need to do is press buy/sell and we’re either in or out of our trade. However, it’s not that simple.
The only time it really is THAT simple is:
1. Buy/Hold and fuhgeddaboudit!
This is when you decide to buy into a company that you truly trust and know it’s going to either grow your investments over the long haul or will be an income generating stock (dividend stock). So you press BUY and literally you walk away and fuhgeddaboudit!
2. Financial / Money Manager – instead of you doing the pressing of the BUY button, someone else does it for you. You basically can say, ‘Go for it!’ or sometimes be completely hands off and simply go with their decisions. But you have contact with your manager and chances are, you will be given the option of deciding what you want to do, even if it is giving them full control.
Why just entering into a position and placing orders isn’t as easy as it looks:
1. Long Position (Going Long) – When you decide to buy long, you want the position to go up in price (always a good thing). So how about when to get out? For people who have specific price targets they must put in a special order which will have you covered on both sides such as when you get out of the trade (profit) and when you get STOPPED out (loss) of the trade.
2. Short Position (Going Short) – works the same as a long position, but in the opposite direction. This is when you’re betting on the company’s shares to go down either due to negative rumors swirling around the stock’s performance. Or a top exec cheating on his wife or stealing money which is the scandalous / delicious stock bottoms. Or the fundamentals aren’t working well. Or the technical analysis you’ve done is showing you that there may be some down-siding coming up. Just remember shorts can’t go too far down, there is always a bottom, so you want to make sure you are out before it starts going up again. You need to set your targets for getting out as well and your stops.
3. When to get in and out – Market price – is when you buy/sell at the price that is right at that minute. However, you can also get in at a price you DECIDE you want. Plus, on top of choosing the price, you immediately can set your target (when you get out) and your stop (risk management). It’s kind of a funky three-way.
So let’s find out how this works. It can be as easy as just a press of a couple of buttons.
Let’s start with the basics – understanding Stock prices and quotes
Market price – this is without a doubt the easiest thing to understand. Look at the price of the position you want to take and that’s what you’ll get. There is a little slippage at times, but we get over it quickly.
Bid, Ask, Spread – What Are You Talking About?
Bid price – What the Buyer wants to pay for the stock/equity (lower than ask price)
Ask price – what the Seller wants to get for the stock/equity (lower than bid price)
Bid/Ask Spread – the difference between what the buyer wants to pay and what the seller is willing to take.
What is this whole Bid/Ask Price anyway?
Think of it this way – when traveling to a different country you head to the bank to exchange money. What do you see light up on a big exchange board behind the bank tellers’ heads? Two prices, right!
1. Dollars into local currency – you are buying the local currency – bid (buy)– you want to get the most amount of local money for each dollar you give them
2. Local currency into dollars – you are selling the local currency to get your dollars back – ask (sell)– you want to sell back the local money and get the most amount of dollars
You will get less local currency for when you buy it and it will cost you more local currency when you sell it back. This is just how it works. You can’t fight it. And the difference is the spread.
For example: Costa Rica currency
Buying local currency with Dollars
500 Colones = $1
Selling Local Currency buying Dollars
490 Colones = $1
Spread of the two
10 Colones for each dollar
So where does the money of the spread go? It’s kept as a tasty profit for either the broker/banker/specialist in charge of the transaction. (NOTE: this is not commissions. If commissions apply is added on top.)
When there is a large spread, chances are the stock is traded too lightly and is not a good stock to invest in.
TIP – On a whole, the bid ask spread needs to be really small. If it’s too high, stay away until it shrinks.
Placing orders to fill you at the best (your desired) price
Market order – This is the easiest of all – Press the buy/sell button and you are instantly filled
1. Buy – you’ve just got yourself some shares, baby
2. Sell – you’ve just sold the shares and hopefully at a profit!
Stop Market order – So you decided to go in at Market price. However, you definitely don’t want the stock to go too far down so you want to prevent huge losses. Or you believe it will go to a certain price and you’ll be happy with that profit. So what do you do?
You stop it in it’s tracks! Either on it’s way down or on it’s way up or both!
Read more about risk management and placing stops.
Once you decide on the right broker for you, you will need to study their platform. When you are ready to make the move, you will see options for Stop Market orders.
Limit Order – This is the second easiest thing when it comes to investing. You pay what you want for the stock.
Let’s say you head to a store and after trying on different jeans you found the pair that fits. But when you look at the price you think to yourself, I can get it at a better rate. So instead of paying the Market price, you bargain with the seller.
Let’s say the price is $100 but you are dead set to pay $90. So you tell the seller, this is the price I am going to pay, take it or leave it.
Sometimes you will get the price that you want almost right away, sometimes the seller tells you to f*** yourself, and other times you might get a call a few days later saying let’s go for it.
This is a limit order. You tell your broker what you WANT to pay for the stock.
Stop Limit order – as with a limit order – you tell your broker which price you want to pay. But you also get to tell them when you want to lick your wounds with a loss or rejoice in your target profit. You can set it up on both sides.
Again, make sure you study your platform, each one has it differently and you want to totally familiarize yourself so it becomes second nature to you!
NOTE: I REALLY recommend to have a free walk through how to use the platform of your chosen online broker. Way too much money is lost when you don’t know how to execute properly.
But on top of that, I highly suggest you play in sim mode for a while to be absolutely perfect when it comes to the real deal!
And Don’t Forget the Time in Force Factor
So you decided to go with the Limit order route. You refuse to pay market and have set a price you want to pay.
When you set a limit order of any sort (Stop Limit or just Limit) you will be asked when do you want it to expire (the actual execution of the trade not how long you hold the shares).
Here are 2 of the most common for you to choose from:
GFD- Good for Day Order – whatever price you decide you only want it executed during market hours of that day. If it doesn’t reach that price that day, it will be canceled and you can decide what you want to do the next day.
GTC – Good Til Canceled – this order will not be canceled over night or even in the near future. You can set the dates you want it to be canceled as well. If it doesn’t get filled.
Hope this clears up all the buy and sell problems. If not, let us know whatever questions you have.
Marina 'The Trader Chick' Villatoro