By Stella Goh – Market Data Analyst | 3 May 2019
At most of the time, brokers and dealers will help to arrange trades by issuing the orders after communicate with buyers and sellers. In the stock market, there are bid price and ask price. Usually, investors or traders buy the stock at the asking price and sell stock at the bid price in the stock market.
In the stock market, the asking price is always higher than the bid price. The highest the bid price in the market is the best bid, while the lowest ask prices in the market are the best offer. Before you are buying or selling the stocks, you must know the different types of orders.
Let’s look at the types of orders in the market.
The market order is an order to buy or sell the order immediately at the best available price. This type takes the execution directly but may not able to acquire the stock at the desired pricing. It may be filled in at a more higher price. Thus you may get more expensive share than anticipated if no willing seller to sell to you at the market price. For example, the market’s ask price for Stock ABC’s is RM3.00, and you may want to buy this Stock ABC immediately at this price. RM3.00 is the current price assuming that the market is open at the moment.
A limit order is an order to buy or sell a security at a specified price. There are two types of limit orders in the market, buy limit order and sell limit order. Limit orders do not execute if the limit price on a buy order is too low, or the limit price on a sell order is too high.
The buy limit order is an order to buy at lower than current market price and only will be executed when asking price drop to the preset level. For example, the current ask price for Stock ABC is RM5. If you wish to buy ABC Stock at RM4, submit a buy limit order of RM4 or lower. Then wait for the price to drop to RM4, the order will perform. If the price never drops to RM4 or lower, the order will not fulfil.
A sell limit order is an order to sell at a higher level than the current market price at a specified price. For example, the current ask price for Stock XYZ is RM12. If the investors or traders wanted to sell Stock XYZ at RM15 which is higher than the current market price, they need to submit a sell limit order at RM15. After that, they need to wait for the current price of the Stock XYZ rises until RM15 or higher; the order only can be executed. However, if the price never rises to RM15 or higher, that means the investors or traders will never sell.
Stop order is an order use to buy or sell a security once the price of the security reached a specified price which is also known as the stop price. There are two types of stop orders such as Sell stop and Buy Stop.
Sell stop order is an order placed below the current price, once it hit the program will execute sell. For examples, the investors or traders bought a stock at RM20 and may want to sell the stock if the stock price falls below RM10 to limit losses. Therefore, the investors or traders can submit a Good-Till-Cancelled Sell Stop at RM10 level. If the market price of the stock falls to or below RM10, the market order becomes valid, and it should immediately fill the order.
Stop buy order is an order which traders will use to buy at higher than the current market price. For example, the Stock EFG currently is traded for RM40. So you can place a Good-Till-Cancelled buy stop order on the stock for RM50. The reason why not use market order is some trader would like to see the stock reach specific price first for confirmation before buying the stock. Once the stock arrives RM50, their order takes effects. Good-till-canceled is an order that investors or traders may place to buy or sell a security that remains active until the order is filled or the investor cancels it.
In conclusion, understand and familiar with the trading platform to execute transaction should be able to help trader/investor on advantages to better manage the entry and exit point for their investment.