The Easiest Order Isn't Always The Best
The most basic of all securities orders is the market order and this is what you're placing if you don't verbally instruct your broker otherwise. If you're using an online brokerage, there should be a box giving you options about the various orders you can use and if you don't select one of those, you'll be getting a market order as well. Market orders simply get you into or out of trade without much consideration for price you want. Market order a buy or sell order in which tells your broker to execute the order at the price currently available. You're not likely to get the best available price with a market order because market makers interpret market orders as a trader saying "Just get me in or out, I don't care about price."
So market orders are great if you desperately need to get into or out of a trade quickly, but they're not very precise. The pros hardly ever use market orders and the problem with them comes when a market maker shuffles your order down the priority line. You may see a stock trading at $25.50 and you want to buy it, but if volume starts to pop and the offer price starts to rise, you could end up with a price like $25.57 or $25.59. And the same thing goes for selling or going short, so only use market orders if you absolutely have to.
Stop Orders: A Potential Life-Saver
You can use protective stops to either lock in profits or prevent big losses, but stop orders can also be placed to enter trades as well. In fact, placing stop orders to go long or short near your desired entry points is a great way to ensure you get into a trade that you want to be in. The market moves faster than you can click your mouse and saving a few seconds here and there can get you better pricing.
Here's what you need to remember about stop orders: Unless you are using a stop limit order (we'll get into limit orders later) you're using a stop market order. This means that while you may place at a stop at $25.50, when the stock crosses that price, your order becomes a market order. There is no guarantee that you'll get $25.50 as the exact entry price of your trade. Once $25.50 is printed your order is activated, but not necessarily filled at that price. In a fast market you might get filled at $25.75 or even much higher. If your stop order isn't filled at your desired price, you will likely get one of the next available prices, but the slippage won't be as bad as you might experience with a traditional market order.
Limit Orders: The Best Of All
Limit orders are great, especially when you're exiting a profitable trade. A neat benefit of limit orders is that many exchanges actually give traders a small rebate on their trading costs when they use limit orders because these orders keep liquidity flowing and don't upset the balance of the bid and ask spreads.
Here's how limit orders work. Let's say you're already in a profitable long trade, and you want to exit at $25.50. That's the price you absolutely want, not a penny less. You send your limit order through and if you have real-time quotes, you'll see your order pop in the ask column (assuming you're selling). If that stock goes to $25.50, some or all of your position should be taken out. But here's the risk: By using limit orders, you're saying you won't accept another price other than the one you've entered. If that stock goes to $25.49, but falls back, your $25.50 limit order just sits there and doesn't get filled. The price you want has to print for your order to be filled. The moral of the story is be careful with your limit orders and be prepared to pull them back if a trade goes against you.
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