Market Order And Stop Order

When you buy stock, the simplest type of order is a market order an order to buy or sell a stock at the market’s current best available price. It doesn’t get any more basic than that. Here’s an example-nnKowalski, Inc., is available at the market price of $10. When you call up your broker and instruct him to buy 100 shares “at the market,” the broker will implement the order for your account, and you pay $1,000 plus commission.nnI say current best available price because the stock’s price is constantly moving, and catching the best price can be a function of the broker’s ability to process the stock purchase. For very active stocks, the price change can happen within seconds. It’s not unheard of to have three brokers simultaneously place orders for the same stocks and get three different prices because of differences in the broker’s capability.nnThe advantage of a market order is that the transaction is processed immediately, and you get your stock without worrying about whether it hits a particular price. For example, if you buy Kowalski, Inc., with a market order, you know that by the end of that phone call , you’re assured of getting the stock. The disadvantage of a market order is that you can’t control the price that you pay for the stock. Whether you’re buying or selling your shares, you may not realize the exact price you expect (especially if you’re buying a volatile stock).nnMarket orders get finalized in the chronological order in which they’re placed. Your price may change because the orders ahead of you in line caused the stock price to rise or fall based on the latest news.nnStop ordersnnA stop order (or stop-loss order if you own the stock) is a condition-related order that instructs the broker to sell a particular stock only when the stock reaches a particular price. It acts like a trigger, and the stop order converts to a market order to sell the stock immediately. The stop-loss order isn’t designed to take advantage of small, short-term moves in the stock’s price. It’s meant to help you protect the bulk of your money when the market turns against your stock investment in a sudden manner.nnSay that your Kowalski, Inc., stock rises to $20 per share and you seek to protect your investment against a possible future market decline. A stop-loss order at $18 triggers your broker to sell the stock immediately if it falls to the $18 mark. In this example, if the stock suddenly drops to $17, it still triggers the stop-loss order, but the finalized sale price is $17. In a volatile market, you may not be able to sell at your precise stop-loss price. However, because the order automatically gets converted into a market order, the sale will be done, and you prevent further declines in the stock.nnThe main benefit of a stop-loss order is that it prevents a major decline in a stock that you own. It’s a form of discipline that’s important in investing in order to minimize potential losses. Investors can find it agonizing to sell a stock that has fallen. If they don’t sell, however, the stock often continues to plummet as investors continue to hold on while hoping for a rebound in the price.