Market orders are the kind most commonly given when purchasing and selling stock. When you place a market order, you simply tell your broker to purchase or sell a certain number of shares. You do not specify the price or time frame within which you consider the purchase or sale acceptable. As discussed previously, the market order is assumed to be a day order, unless specified
. The broker will go to the market, usually within a couple of minutes ”or in the case of e-brokerages, seconds ”and purchase or sell your stock at whatever price the stock is trading.
also know as
instruct the broker to go to the market immediately and buy or sell shares at whatever price is currently being
If the order were
to be fulfilled immediately, would there be any reason for not making it a day order? Could it be anything else? Sometimes stocks may be difficult to sell or to find for purchase at given rates. For example, say you want to buy 100 shares of XYZ Company stock. Remember that XYZ Company issued a limited number of stocks to begin with, so there are really only 105 shares trading on the market. It's going to take your broker a lot longer than a day to track down those 100 shares for you to purchase ”if he or she is able to do it at all. In the case of selling, should your stock be unattractive, the broker may not be able to find someone who is willing to purchase it. In either case, you may wish to consider leaving the order open a little longer than a day by using one of the previously discussed notations.
As a side note, the broker doesn't really "go to the market." One thing those Wall Street movies do show
is that there are already far too many people on the Exchange floor. In addition, some of those markets aren't physically real, but we'll get into that later. Almost all transactions these days are handled by computerized systems, so your broker is free to conduct your business within the
of his or her office.
named, as they imply that a limit has been placed on the price the investor is willing to pay to purchase the stock or that a minimum price has been given at which the investor will sell the shares he or she currently owns. In addition, limit orders are always placed at a different price than that at which the stock is currently trading ”higher for sales and lower for buys. This is known as
away from the market.
instruct a broker to purchase stock at a price lower than the current market price or to sell stock at a price higher than the current market price.
Let's suppose that you want to buy 100 shares of XYZ Company, which at the moment is trading for $10 per share. You are convinced, because of something you read in the newspaper, that the price of the stock is about to drop ”XYZ is being sued for copying ABC Com-pany's patent, let's say. You are an attorney who
that ABC Company's case won't stand up in
. Therefore, you figure that the initial price of $10 per share of XYZ Company will drop when people get the bad news and then will go up again when people get the later news that the case has been dismissed. You give your broker a
buy limit order.
The buy limit order
your broker to purchase XYZ Company's stock
only when it
to a certain price,
which in your case is $8. You will also probably want to use a notation to tell your broker how long you are willing to wait for the price to drop: a day, a week, or a month. You do this, of course, believing that the value of the stock will eventually go back up. So your investment strategy is to buy as if the stock is on momentary sale.
On the other hand, if you currently own XYZ stock valued at $8 and you believe its price is going to go up and then later drop, you will want to give your broker a
sell limit order.
By doing so, you tell the broker to sell your stock only if the price rises to $10. Of course, you are
that the price of XYZ stock will later drop and
below the price of $10. This is called getting out when the going's good.
that the type of timing necessary to successfully manipulate limit orders doesn't come quickly or easily. New investors are strongly urged to consider the pitfalls in this type of trading before attempting it.