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 ETF Authority Educational Archive -- ORDER TYPES This week I am going to take a little side excursion to talk about the different types of orders that you might want to enter into the stock market when buying or selling shares. Whether you trade online or with a live broker, there are many different ways to tell your broker how you want to buy or sell your shares. At times I have suggested fairly complicated strategies for entering and exiting positions, so I thought that it would be a good idea to explain how some of these orders work. SHORT SALE -- Any time that you sell stock you do not already own, it is considered to be a short sale. This means that you actually are borrowing the shares from somebody else, then selling them immediately in the open market in the hopes of repurchasing them at a lower price in the future. One of the downsides to shorting is that some brokers do not always have all stocks and ETFs available to borrow. If that is the case, then you will not be able to execute your short sale. Also note that when you are short, you must pay any dividends received to the person you borrowed the shares from. Additionally, you will pay interest on the funds borrowed, but should receive interest on the cash you bring in from the short sale. Note that most ETFs allow you to sell short on what is called a "downtick" (last trade lower than the prior trade). This is not permitted in common stocks (although downtick shorts are possible for odd-lot trades). When you enter into a short sale, you profit if the price of the stock or ETF falls. MARKET ORDER -- Many of my trade recommendations involve market orders. A market order merely means to buy or sell the stock, or ETF, at whatever price currently prevails in the market. This means that if prices jump while you are entering in your order, and you are buying the shares, you might pay more than you expected. (Of course, the market could fall as well, so you could pay less.) You may enter in market orders on buy, sell, or short sale orders. LIMIT ORDER -- A limit order is used to buy or sell shares at a specified price. When you want to buy at a price below current trading levels, you should use a "buy limit." For example, if SPY is trading at $100, but you want to buy at $99 or lower, then you would put in a limit order to buy at $99 or better (lower). If you are selling short, then the opposite is true (your limit order is for a sale above current prices). MARKET WITH LIMIT ORDER -- Let's say you want to buy 10,000 shares of a stock or ETF that is fairly thinly traded. You can enter an order to buy at the market, but at the same time you can also specify that you do not want to pay above a certain price. The opposite would be true of a "sell with limit" order. Note that not all brokers or exchanges will allow these types of orders. MARKET ON CLOSE (MOC) – This particular type of order allows you to buy or sell at the closing level in the market. This is a standard order type on both the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), but these trades may not be available in Nasdaq issues. NYSE and AMEX will guarantee these orders as long as they are entered by a certain time during the day. However, a large amount of such orders will affect where the stock actually closes. MARKET ON OPEN (MOO) -- There really isn't such an animal in the equity world. It would be the same thing as entering a market order before the market opens. GOOD UNTIL CANCELLED ORDER (GTC) – This type of order could is a buy/sell/short sale that remains in effect until you cancel it. Note, however, that most brokers will limit the amount of time an order is actually good for, and some direct access and electronic systems do not permit these kinds of orders at all. Additionally, these orders are not accepted by all exchanges, although your broker may hold the order for you. If this is the case, then the order might not be guaranteed to be filled. GTC orders are typically orders to buy or sell shares a levels that are fairly far from current market prices. DAY ORDER – Any order that expires at the end of the current trading day is called a DAY ORDER. STOP ORDER -- Traders often employ stop orders to protect against losses or, in an already profitable position, to lock in a certain amount of profits. For example, if you buy SPY at $100, then you might enter a STOP LOSS SELL order at $98. This order then becomes a SELL AT MARKET order if SPY trades at or below $98. Be aware that if the market is falling sharply, or gaps open below that price, then you might incur a sale well below your stop price. Meanwhile, traders often use STOP LOSS BUY orders (with a price above the current market) to protect their short positions. You can also use stop orders to enter into a position on a breakout. A BUY STOP above the market would put you into a long position if prices reach your predetermined buy level. Meanwhile, a SELL STOP below the market would be executed when prices reach your sell level. STOP LIMIT ORDER – This is similar to a stop order, but protects against a temporary runaway market by limiting the price you are willing to execute your stop at. This type of order can be particularly useful when trading less liquid issues and ETFs. For example, if an ETF has a wide bid/ask spread (you can usually buy at the ask price and sell at the bid price), then you might wish to use a limit order to prevent a sharp move away from your intended entry price. This is especially true if you are trading on the electronic communications networks (ECNs), where software will keep seeking a lower bid (on a stop loss sale) until the trade is filled. If you trade on the AMEX or NYSE, then the specialist will attempt to keep an orderly market, which will likely prevent the market from running away from you even if you do not set a limit price. A sample STOP LIMIT ORDER might be to SELL 500 SHARES of EWC, STOP $11.10, LIMIT $10.90. This means that you want to sell your 500 shares of EWC if price touches or moves below $11.10, but you are not willing to sell those shares, even if you still hold all or part of your position, at a price below $10.90. The risk in using STOP LIMIT orders is that if prices continue sharply in one direction (in the case of the example I just gave, this direction would be LOWER), then you may ultimately be forced to exit your trade at a much worse price level if prices do not move back to your original limit. TRAILING STOPS – The exchanges and Nasdaq do not directly support trailing stops. However, some electronic trading platforms and trading software do. I often suggest trades that involve the use of trailing stops to protect profits. For example, if you buy SMH at $30.00, then I might tell you to trail stops $0.25 cents behind current prices as soon as SMH reaches $30.50. This involves entering a STOP LOSS sale at $30.25 if/when SMH reaches $30.50. If SMH then climbs to $30.75, for example, then you would change the price level on your stop to $30.50. Please note that STOP orders are not technically available for stocks that trade exclusively on the Nasdaq. Instead, they are only available for listed AMEX and NYSE issues. However, most brokers will accept stop orders on a "best efforts" basis. That means there are no guarantees involved. Also note that many direct access platforms will simulate stop orders by automatically monitoring your position and then sending in a market order when your stop requirements are achieved. Stop orders also are not typically available in the options market. ONE CANCELS OTHER (OCO) -- This kind of trade actually involves two orders. Let's say QQQ has been stuck in a $28-$30 trading range, but you feel it is bound to make a sharp move once it breaks out of this range. To jump on board the shares as soon as they move out of their $28-$30 range, you could place a BUY STOP at $30.01 for 100 shares and a SELL STOP at $27.99 for 100 shares OCO. This means if prices trade to or above $30.01, then you will buy 100 shares of QQQ and your SELL STOP order would be cancelled. Likewise, if prices first trade to or below $27.99, then your sell order would be executed and your buy order would be cancelled. The following order types are highly specialized. I am not likely to use any of these order types in future ETF Authority issues, but I felt it was worth noting them: MARKET IF TOUCHED (MIT) – Buy or sell an issue if a certain price is touched. MIT orders are more common in the futures market and are not typically supported in over-the-counter (Nasdaq) markets. The difference between an MIT and STOP order is that, in the over-the-counter markets, MIT orders may be executed without a trade occurring at the price as long as the shares are bid or offered at the MIT designated level. ALL OR NONE (AON) -- This kind of order tells the broker to execute the trade only if your entire trade lot can be executed at your specified price. FILL OR KILL (FOK) – This is similar to AON, except the trade is cancelled if it cannot be filled immediately. Good trading!
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