Brokerage firms offer different types of trades or orders that you can use to limit the risk of buying and owning stocks.
Sometimes it seems as if everything about investing has to be as complex as possible. The act of buying and selling shares has its own set of rules and terms. You don’t have to be an expert in every type of trade available, but you can increase your success and avoid nasty surprises by taking advantage of specialized trade types.
Let’s start with the basics. If you want to buy or sell a stock, but don’t care about how much you’ll pay or receive for the shares, use a market order, which means that your brokerage firm fills your order as soon as possible at the best available price at that time. The advantage of market orders is that you’re practically guaranteed that your order will be filled, usually within seconds. Market orders go to the front of the line in the marketplace, taking precedence over any other type of trade placed at the same time.
In general, the longer you intend to own a stock, the more appropriate it is to use a market order to buy it. A long-term investor who intends to hold a stock for five or ten years doesn’t need to worry about getting the absolute best price on every trade. The difference of a few pennies or even dollars today isn’t likely to make any appreciable difference in total return in five years.
The disadvantage of market orders is that the best available price might be significantly worse than you ...