Monday, 19 November 2007

Types of Order in the Market and Time Limits with Trade Orders

If you have trade in the US market before, you will realise that the US market has so many features that you cannot find in Singapore market. Take for example, the types of order in the market. What is type of order in the market? In the US, we have orders such as Market Order, Limit Order and Stop Loss/Sell Stop etc. What do they mean?

Market Order
This is where you authorise your broker to buy or sell stock or options at the best price in the market.

Limit Order
This is where you:

  • only buy if share falls to a certain price or lower; or
  • only sell if share rises to certain price or higher.

Limits are recommended with options trading, particularly for spreads and combination trades. The reason for this is that the bid/ask spread prices can fluctuate dramatically and often not in your favour, so it is better to specify your prices.

Stop Loss/Sell Stop (Defensive)
This is where you:

  • Sell if stock falls below a certain price (sell stop is placed below the current price).

You can increase the stop loss if the share rises.

Buy Stops
This is where you will only buy once the stock has reached or exceeded a certain price. This is like the opposite of a limit order where you look to buy a stock when it has fallen to a certain price. A Buy Stop is appropriate where you expect a stock to rise beyond a resistance level or bounce up from a support level.

  • Buy Stop with limit - Only buy when stock is between two prices.
  • Buy Stop with limit and Stop Loss - Buy between two prices and sell if below another price.

There are however some time limits with different type of trade orders such as GTC, Day only, Week only etc. What do these mean then?

Good Till Cancelled (GTC)
This is where the order is valid unless and until you cancel it or until it is filled. For example, a limit order GTC means you authorise your broker to sell the stock at a particular price, today or any time in the future where the stock is selling at that particular amount, until you have sold the requisite number of shares.
Smith Barney Benefit Access uses this. Be careful with GTC orders because these orders generally do not go to the top of the list of floor traders’ priorities.

Day Only
The order will be cancelled if it is not filled by the end of the day. This is a good ploy because it encourages the floor traders to deal. If they don’t by the end of the day, then they won’t get their commission, so there is an incentive for floor traders to put this type of trade nearer to the top of their list.

Week Only
The order will be cancelled if it is not filled by the end of the week.

Fill or Kill
The order of maximum priority. If it is not filled immediately, the order is cancelled. A fill or kill order is bound to capture the attention of the floor trader, but if it is a limit order, then you need to make it realistic.

All or None
Either the entire order is filled or none of it. This is not generally a good idea given that many trades are not filled all at once anyway because there has to be a buyer or seller on the other side, and most of the time they won’t be specifically dealing in the same lot sizes as your order. So if you want to be sure to get filled, do not go for all or none!

No comments: