Many investors who are just getting started in the stock and options market regularly ask about the basic terminology regarding getting in and out of their positions. In this article we will review the basic orders, what they mean and when they should be implemented. Stock orders-such as market orders, limit orders, stop-loss orders and trailing stops-are important for every investor to know.

A market order is really the simplest to understand of all the order types. The market order instructs your broker to buy or sell the stock immediately at the prevailing price, whatever that may be. Basically, what a market order communicates is to trade now at the market price. In most cases, the order will execute immediately, which is especially important when a stock price is moving quickly and you need to buy or sell within a few seconds.

Limit orders instruct the broker to buy or sell a stock at a particular price. Limit orders give you control over your entry or exit point by fixing the price, which can be helpful. The limit order is conveying the message that you want to trade at your price or better. When working with limit orders the stock trader specifies the highest price they are willing to pay for buy orders or lowest price they are willing to accept for sell orders.

Stop-loss orders are typically implemented at a point below the current market price. If the stock falls to this price point, the stop-loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop-loss order does nothing. Essentially stop-loss orders are cheap insurance that protects you from a loss getting out of control.

On the other hand, if the stock is showing a profit, you can use the trailing stop order to follow the trend up and let the profits run. Many times traders use the trailing stop order as a percentage of the market price. If the market price declines by that percentage, the trailing stop becomes a market order and your broker sells the stock. If the stock continues to rise, the trailing stop follows it up since it is a percentage of the market price.

Keep in mind that, unlike market orders, the limit order, stop-loss order and trailing stop order are not always met immediately or even at all since they have conditions attached to their execution. Also, keep in mind these are the most basic orders and there are certainly other orders than can be implemented such as market-if-touched and contingency orders. It is always wise for the investor to check with their individual brokerage firms and become aware of the inventory of order types that are offered.

Happy Trading.


Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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