Stock Trading Basics and Order Types
In order to be successful at the stock exchange you should be able first to understand how the trading process itself works. You are probably used to the traditional trading in which you go to the shop and pay the price that has been set by the seller. However, in the stock exchange both sellers and buyers set the prices at which they are willing and able to trade. This article will provide you with the foundations of the stock trading process as well as with information on trading orders.
As it was mentioned above both buyers and sellers are the people who are responsible for the setting of the prices of stocks. As a result you will encounter two types of prices. The first one is the ask price, which is the price at which the seller is willing and able to sell the stock. The second price is the bid price at which the buyer is willing and able to purchase the stock. As you can guess the bid and ask price are rarely the same. The difference between ask and bid price is referred to as the spread. This difference goes to the broker as his/her profit for selling you the particular stock. Specialists are in charge of the coordination between bids and asks, so that the amount of the spread is kept at a minimum.
The dynamics of the stock prices require you to be at a constant watch. For instance, you have decided that now is the time to sell a particular stock after you have seen its price on the Internet. However, time passes until the actual trade is executed since it passes through several procedures. As a result, when the stock is finally sold it may not be at the price you have seen on the Internet, but a much lower one. Thus, you can lose money.
The good news is that trading is facilitated by many additional tools that minimize the possibility of such disparities. There are different types of orders through which you can avoid the mentioned above losses due to too much time between your intentions of selling and the actual execution of the sale.
Some of the orders are as follows:
- Market Orders
Under a market order, a stock is purchased at the prevailing market price by your broker under your orders. The responsibilities of the broker are very limited, which results in a lower commission for him.
- Limit Order
You specify a particular price. This price level is used for the future stock trades. For instance, your broker can purchase a stock at the specified price or below it. On the other hand, s/he can sell a stock at the specified price or above it.
- Stop Order
Under a stop order the broker executes a stock purchase when its price reaches a level above the current market price. On the other hand, the broker executes a stock sale when its price reaches a level below the current market price.
- Day Order
Under the day order, the broker is required to execute the trade until the end of the trading day. Failure to do so leads to unfilled order.
- Fill or Kill
Under a fill or kill order, the broker is required to execute the trade at once. Failure to do so results in an unexecuted order.
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