The importance of understanding orders: learning to invest with intention

The importance of understanding orders: learning to invest with intention

Written by Katie Gomez

When you make the transition from investing to trading, there are certain things you have to start thinking about when it comes to your investments. Compared to retail investing apps like Robinhood, the advantage of using brokerage programs like Trade Ideas’ Brokerage Plus is the opportunity to send in different types of orders. Depending on your investing or trading style, the types of orders you use can allow you to trade stocks more effectively. However, for someone new to the trading world, figuring out how to send in your orders and keep track of them can seem like a full-time job. That said, I will break down the two main types of orders and review how you can use other subtypes to maximize your investment profits.

Market and limit orders are the primary orders every trader should know how to use. Given that market orders are typically the default for brokers, you should be familiar with this one. Basically, a market order is an instruction made by a trader or investor to a broker or brokerage program to either buy or sell some kind of equity (stocks, shares, bonds, etc.) at the best price currently available, given market conditions (Beers, 2023). However, just because this is the most commonly used or default order does not mean it is the only one we can nor should use, as different orders serve to fulfill other purposes or intentions.

On the other hand, limit orders differ from market orders in that investors can order to buy or sell at a predetermined price. For instance, if you send in a buy limit order, it can only be executed at that specified limit price or lower, while a sell limit order can only be executed at the limit price or higher. Therefore, limit orders give you more of a sense of control as an investor because you are not subject to the fluctuating price market orders rely on. Of course, the type of order you choose to use depends on your intention behind the investment (speed, efficiency, maximizing profits, portfolio diversification, practice, etc.).

For instance, a market order will serve you better if you intend to execute an order as quickly as possible. However, suppose you are dealing with more volatile investments where the market price constantly fluctuates. In that case, it may be safer to execute a limit order to protect your assets and make the most of your investment. 

Once you understand the market and limit orders better, you can start diving deeper by utilizing additional types of orders. There are several orders you can use to serve different purposes, and once you learn how to use them, it’s like discovering the filter button in online shopping—you can find what suits your needs at this moment a lot more efficiently when you know what you are looking for. 

Stop losses are the most common and easy-to-use orders to limit your losses in the stock market. These orders trigger the contract when a target price is met and converted into a standard market order to be executed at the next available bid (Hayes, 2023).

Another helpful yet less common order to utilize is a stop-limit order. Like stop-loss orders, stop-limit orders act as a safety net to protect your investment from crippling loss once your specified price is triggered. The only difference between the two is that stop-limit triggers a limit order once that price is hit (instead of a market order).

It can be complicated for a trader to consistently track stock prices and transact various securities throughout the day. While standard market orders are solid and relatively quick to execute, you may not always get the intended price and end up frustrated or stuck. However, if you have a time-sensitive, volatile investment, an Immediate or Cancel (IOC) order comes in handy—executing at least part of the specified order right away, canceling the balance if not available. IOC limit orders prevent inefficient execution in fast-moving or illiquid markets. In contrast, an IOC market order can guarantee the execution (at least partially) of a stock in high (buying) demand (IIFL Securities, 2023). 

On the other hand, if you are set on a price amount and will not settle for partial execution that IOC orders might leave you with, you can submit a Fill or Kill order. These orders are a bit more extreme than the former in that the order must be executed in its entirety (not partially), or else the order will be canceled—all or nothing.

These are just a few examples of new orders you can add to your trading toolbox to help you get a little more out of your investments and get out of your comfort zone trading. Practive using simulated trading. The more you practice sending different types of orders, the more confidence you get without risking real money. 

The more tools you have as a trader, the more secure you will feel with your investments because you can weigh out all of your options instead of sending orders that you aren’t sure about. If what you are currently doing is not working for you and your trades, you must start to reflect and review where your problems lie. Although it may seem like more options will make trading that much more complex, understanding the different types of orders is a great place to begin rebuilding your confidence and elevating your trading game. For more insight to help propel you forward in your trading journey, visit Trade Ideas today.