Ways to place a trade

An order is a message

When you want to buy or sell, you send your broker an order. It's a message that says what you want, how many, and at what price.

There are three main kinds. Imagine a video game whose price right now is about $10.

1. Market order: "Right now, please"

A market order says: buy (or sell) right now, at the best price there is.

• Good: it happens almost instantly.
• Not so good: you don't choose the exact price. You get whatever it is at that moment, which is usually very close to what you saw.

It's like walking up to the counter and saying, "I'll take it," without checking the sticker again.

2. Limit order: "Only at my price or better"

A limit order says: buy only at this price or cheaper. (Or, when selling: sell only at this price or higher.)

• You place a limit buy at $9. If the price drops to $9, you buy. If it never gets that low, nothing happens.
• Good: you never pay more than you wanted.
• Not so good: it might never happen, and you miss out.

It's like saying, "I'll buy that game, but only if it goes on sale for $9."

3. Stop order: "If it gets this bad, get me out"

A stop order waits at a price you choose. When price reaches it, it turns into a market order.

Traders mostly use stops to get out of a trade that's going wrong. You bought at $10. You place a sell stop at $8. If price falls to $8, your broker sells for you, so your loss stays small.

• Good: it protects you even when you're not watching.
• Not so good: when price is moving fast, you might get out a little worse than $8, like $7.95. That's called slippage.

Bid, ask and spread

A trading screen shows two prices, not one:

• The bid: the highest price a buyer is offering right now.
• The ask: the lowest price a seller will take right now.

The gap between them is the spread. If the bid is $9.99 and the ask is $10.01, the spread is 2 cents. A market buy pays the ask. A market sell gets the bid. That little gap is a hidden cost every time you trade.

Getting filled

When your order actually happens, traders say it got filled. A market order fills almost right away. A limit order or a stop order fills only if price reaches it.

Remember

• Market order: right now, at whatever the price is.
• Limit order: only at your price or better, but it might never happen.
• Stop order: waits at a price, then gets you in or out when price gets there.
• Buyers offer the bid, sellers ask the ask, and the gap is the spread.