Financial Definitions: Stock Orders

When I finally decided to invest in stocks, I was a little intimidated by the whole process. I envisioned a Hollywood version of Wall Street portrayed in “Boiler Room”: you know, where Vin Diesel pressures a doctor to buy 2000 shares of a crappy stock through some trickery. I didn’t want to be in the same boat (of the trickery, not of speaking with Vin Diesel…), so I did a little research first, beginning with what an order on the stock market actually is and how it works. Join me for my findings!

Order

In general, an order is an instruction you give to your broker to buy or sell shares of stock for you on the stock market. Rather simple, right? Well, there are a few more details to the order process that could come in handy. Here, we’ll look at the more basic orders: the market order, the limit order, and the stop loss order.

The Market Order

When you think of buying stocks on the market, you might automatically think about a market order. Basically, the market order works the same way you would purchase a box of crackers in the grocery store: you can go to the market, pick up your box of saltines, buy it at the price advertised, and move on your merry way.

You know that your cracker purchase will be filled at the current market price, and the same is true of stocks on the market: the stocks are sold at the current price. Since this is the most straightforward way of doing any business, many investors gravitate toward this idea rather readily. Now, though, let’s throw a little twist into the order process.

The Limit Order

Okay, let’s say you’ve had your eye on that same box of crackers for a few weeks. You expect a sale to be peaking around the corner or a coupon to be popping up in the Sunday paper. If you had a cracker broker, you could place a limit order for the box of salty goodness; this broker could wait for the price to be where you want it to be and then swoop in and buy a few boxes at the optimal price.

The limit order on the stock market works the same way (in a much less creepy fashion – can you imagine men and women in Italian suits skulking around the cracker aisle at the local supermarket?). Anywho, as I was saying, the limit order on Wall Street allows you to tell your stockbroker at what price you would like to buy or sell your shares; she’ll watch for that price and then buy.

The Stop Loss Order

The final order we’ll look at is the stop loss order. This order allows you to set a price for some time in the future at which your broker will buy or sell a security. This allows you to set an ideal price point for making your optimal amount of money or for stopping your losses before they can go too far.

Our cracker broker, for example, may purchase your box of crackers for $2 with the intent to re-sell it for more. Provided he doesn’t get hungry and open the box, you could tell your broker to hang out in the cracker aisle with your sale and wait until someone is willing to pay $4 for the whole shebang. On the other hand, if the price continues to fall, you could order cracker man to sell at $1.50 to decrease your potential losses.

That’s it: the basics of cracker sales…I mean, of stock orders. There are quite a few more details to purchasing stocks, but knowing the ins and outs of how to buy and sell can get you started. Follow us in the weeks to come as we delve into further stock definitions!

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