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Getting Started

Getting Started
Categories

 - Introduction
 - Picking a Firm
 - Opening an Account
 - Types of Accounts
 - The Importance of Title
 - Placing an Order
 - Order Duration
 - The Entrance Fee
 - SIPC


   

 

 

 


Placing an Order

 

When placing a trade, it’s important to understand the differences between the various dates used and the types of orders that are available to you.

The Dates – When investing, you need to know your starting and finishing times. The date that an order is placed and executed is called the trade date.  It is significant because that’s the date used as the purchase or sales date when calculating your gain or loss on Schedule D for IRS tax purposes. The settlement date is when the cash transaction occurs in your account. Typically, trades are settled within three days. The trade date tracks the accounting of the transaction, while the settlement date tracks the cash flow on the transaction.  Technology has made major advancements in transaction processing; hopefully, in the future, we could see the same day settlement of funds. 

The Types of Orders

Benjamin Franklin once said: “watch the pennies and the dollars will take care of themselves.” That doesn’t work with the stock market! You need to watch both your pennies and dollars. Once you make the decision to buy or sell a security, you then need to focus on the best price for the lowest cost. The type of order you place is your instruction on how your trade is to be executed. Focus on the moment and try to maximize your profits. Your order type is tricky and it does create anxiety. For example, if you place a below market limited order, and if the price does not hit, you may lose out on a good investment. The same happens with stop orders. The use of sell stop orders is popular when trying to protect your profits. There are, however, going to be occasions when the security drops and the sell order is executed, after which the security bounces back up in value. Being sold out of a good investment, because of short-term price fluctuations, can be frustrating and happens if the stop price is not set properly when using stop orders. There are also no guarantees that orders will be executed.

Here are the main choices:

Market Order – Market orders are instructions to make an immediate trade at the best available market price. This is the basic and most common type of order. Time is the critical focus and is more important then price. Market orders are usually executed because price is secondary. The stock price is set as the trade is executed. If the stock is liquid you should be fine. There are, however, many situations where prices change quickly, as with IPO’s, and use of a market order may be inappropriate. Investors, in 1980, who purchased Genentech’s IPO using market orders, understand this concept well. The stock initially traded at $35 per share and quickly rose to approximately $100 per share. With market orders, you are allowing the marketplace to control your purchase price, which may or may not be wise.

Limited (Or Better) Order – This involves placing price restrictions on the order, and authorizing a transaction to be executed at a specified price or better. The critical element of the trade is the price of the security; price is more important than time. The objective is not to overpay for a stock, or to realize a certain price when selling. Commission rates can be higher using limited orders.

Stop Order – A stop order is your instruction to buy or sell a certain stock if a specified price is reached. Once the specified price is reached, the stop order converts to a market order and is executed. There are sell stop orders, which are used to protect one’s capital and profits if a security drops in value. There are also buy stop orders, normally used to protect the capital and profits of short sellers. Buy stop orders are set to purchase shares above the current market price. [Short sellers borrow shares of stock with the hope of returning them at a lower price, thus making a profit. If, however, a stock price increases in value, the short sellers lose. To close their positions or limit their losses, the short sellers use buy stop orders, to return (buy) the stock that was borrowed.] Stop orders are popular because your positions do not have to be constantly monitored.

Trailing Stop Orders – Trailing stop orders are instructions where the activation price of a stop order is pegged to a moving stock price. With long positions, as the stock price moves up, the stop order is periodically recalculated and a new activation price is set, according to your preset parameters. Using trailing stop orders is a disciplined exit strategy, where you are protecting your gains and selling as a stock retreats from its peak price. For selling stop orders, the activation price only moves upward. Conversely, for buy trailing stop orders, the activation price only decreases.

Stop-Limited Order – The SEC’s website defines a stop-limited order as “an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at a specified price.”

Next review information on: Order Duration.

 

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