Limit Order, Stop Order, and Market Order in Stocks
When participating in the stock market, understanding the basic types of trading orders is an important factor to help investors effectively manage their investment portfolio and control risks. The three main types of orders commonly used are: Market Order, Limit Order and Stop Order. Below is a detailed analysis of each type of order:
What is a Market Order?
A market order is an order to buy or sell securities at the best price available on the market. When placing this order, the transaction will be executed immediately at the current market price, but there is no guarantee of a specific price. This type of order is suitable when investors want to quickly enter or exit the market.
An example of a buy market order: Suppose you want to buy 100 shares of Company XYZ. If the current lowest selling price is 100,000 VND/share, your order will be matched immediately at this price. However, if there are many people placing buy orders and the supply is not enough to meet the demand, the price may rise to VND101,000/share and you will have to buy at this price.
What is a Limit Order?
A limit order allows investors to buy or sell securities at a specific price or better. A buy order will be executed at the limit price or lower, while a sell order will be executed at the limit price or higher. A limit order helps control the execution price, but it does not guarantee that the order will be filled if the market does not reach the set price.
An example of a sell limit order: You own 100 shares of ABC Company and want to sell when the price reaches VND150,000/share. You place a sell limit order at VND150,000. If the market price reaches or exceeds this price, your order will be filled. Otherwise, the order will not be filled.
What is a Stop Order?
A stop order is an order to buy or sell a security when the price reaches a certain level, called the stop price. When the market price reaches the stop price, the order becomes a market order and is executed at the current price. Stop orders are often used to protect profits or limit losses.
Example of a stop sell order: You buy 200 shares of DEF Company at VND80,000/share. To limit losses, you place a stop sell order at VND75,000. If the price drops to VND75,000, your order will be triggered and sell the stock at the current market price.
What is a Stop-Limit Order?
A stop-limit order combines a stop order and a limit order. When the price reaches the stop price, the order becomes a limit order at the specific price set. This helps control the execution price after the order is triggered, but does not guarantee that the order will be filled if the market price does not reach the limit price.
Example of a stop limit order: You buy 500 shares of GHI Company at VND 120,000/share. To protect your capital, you place a stop limit sell order with a stop price of VND 115,000 and a limit price of VND 114,000. If the price drops to VND 115,000, the order will be triggered and become a limit sell order at VND 114,000. If the market price drops rapidly and there are no buyers at this price, your order may not be filled.
Conclusion
Understanding and using the correct types of trading orders is an important factor in helping investors achieve their financial goals and manage risks effectively. Market orders are suitable when a trade needs to be executed quickly, while limit and stop orders provide better price control and risk management. Investors should carefully consider and choose the order type that best suits their investment strategy and goals.