Online Stock Trading

Are you familiar with the four basic types of online trades?  There are market orders, limit orders, stop orders, and stop-limit orders.  Understanding how and when to use these different types of orders can improve your trading results.

Market Orders.  A market order is an order to buy or sell a certain number of shares in a company at the current market price.  Assuming the market is open your order is almost certain to be executed within seconds of being placed.  Buy orders will be filled at the ask price and sell orders will be filled at the bid price. Unless the market is moving very rapidly, your price will be very close to the price quote you received just before placing the order.  Now that online stock trading is available, market orders can be entered and executed, and the trader can receive a report of the actual price at which the order was filled all in less than a minute. 

Limit Orders.  When you place a limit order you can specify the price at which you want to buy or sell.  You can place buy limit orders or sell limit orders.  A buy limit order will not be executed until the price of the stock is either at your limit price or below it.  A sell limit order will not be executed until the price of the stock is at your limit price or above it.  In other words you will get your specified price or better.  A limit buy order is commonly used to prevent the possibility of paying more than you want for a stock that is moving up in price. 

Stop Orders.  A stop order is an order that automatically becomes a market order once the stock reaches a specified price.  Stop orders are commonly used to protect profits once a stock has moved into positive territory.  In this case a stop price is selected that is at a point somewhere below the price at which the stock is currently trading.  Then, if the stock falls to the stop price it will automatically be sold, even if the trader is off playing golf. Stop orders cannot be placed for all stocks.

Stop-limit order.  A stop-limit order is designed to give the trader even more control over a stop order.  Because a stop order turns into a market order once the stop price is reached, there is always the possibility that the trade may not be executed until the price has moved quite a bit.  This could happen if the stock is the subject of dramatic news which sends the price up or down rapidly.  A trader can protect himself from that scenario by the use of a stop limit order.  In this case the stop order converts to a limit order once the trigger price has been hit.  The trade will execute at the limit price or better.  There is more of a chance that the order will not be filled however, if the stock is moving rapidly.

Trading styles.

Online stock trading can facilitate any type of trading or investing one chooses to follow.  There are three general approaches to trading. Position trading, swing trading, and day trading.  Position traders seek to identify medium or long-term trends in a stock and take a position that they plan to hold for about a week to several months or even years.  Swing traders have a much shorter time horizon, usually holding a stock for just a few days or a week or two.  They seek to take advantage of short-term swings in the price of a stock that they try to anticipate mostly by technical analysis and chart patterns.  Day traders generally don't hold their positions over night.  They buy and sell stocks during the day catching small price movements and sometimes holding stocks for as little as a minute or two.  For them, online stock trading is a requirement, and they generally subscribe to level II quotes, which give not only bid and ask prices for a stock, but the number of shares at each price, and identification of the market makers involved.

One of the more popular online trading brokers today is Ameritrade.  Another popular online broker is etrade.