How to Make Stock Trades

• Traders using direct-access brokers enter orders directly into their trading software.
• Traders using discount brokers submit orders through their broker’s website using a standard internet browser.

What Happens After You Place an Order?

• If the order is placed with a direct-access broker: It will most likely be filled by computers without any human involvement. DAT-based orders are typically filled within seconds (assuming the stock has sufficient liquidity), whereas broker-based orders generally take longer to fill.
• If the order is placed through a discount broker: The broker will relay the order to the market on which the stock is listed, such as the NYSE, the AMEX, or the NASDAQ. Once the order arrives at the market, a market maker or specialist will execute the order. Orders placed by discount brokers on E-DAT systems, such as the NASDAQ’s SOES or the NYSE’s SuperDOT system, typically are filled as quickly as orders placed with direct-access brokers.

The Four Main Order Types

• Market order: You agree to buy or sell a particular stock at the current market price. The market price is the price for which the stock is currently selling, which usually is somewhere between the stock’s current bid and ask price. With market orders, you have no control over the specific price at which you actually buy or sell the stock—the market sets the price, which can be substantially higher or lower than the price you expect.
• Limit order: You specify the maximum price at which you’re willing to buy, or the minimum price at which you’re willing to sell. If your order can’t be filled at that price, the order is added to the list of outstanding orders and will be executed in the order it was received, when (or if) sufficient demand for the stock exists in the market at the price you set. For instance, if a stock is currently trading for $5 per share and you place a limit order to buy the stock with a limit price of $4.50, your order will execute only when (or if) the market price drops to $4.50 or lower. If the price drops below $4.50, the order will execute at a price less than or equal to $4.50. If it drops to $4.51 but not lower, your order will not execute.
• Stop order: You agree to buy or sell a stock if it reaches a certain price, called a stop price, which is either below or above the current market price. The main difference between a stop order and a limit order is that once the stop price is reached, the order becomes a market order, which means it can potentially be executed at any price set by the market. A stop order in which the price you set is below the current market price is called a stop-loss order.
• Stop-limit order: This order works just like a stop order with one crucial difference—it becomes a limit order, not a market order, once the stop price is reached. For instance, say a stock has a current share price of $10. You might place a stop-limit order that stipulates that you’d be willing to buy the stock once its price crosses $11 (the stop price) but for no more than $12 (the limit price). This way, you might benefit from any upward momentum in the stock price but would be protected from being obligated to buy the stock if it shoots way up beyond your stop price.

Which Order Type Should You Use?

When to Use Market and Stop Orders

Variations on the Main Order Types

• Good-till-cancelled: All orders that do not specify a time limit are cancelled at the end of each trading day. A good-till-cancelled (GTC) order remains in effect until the end of each month. Day traders almost never use GTC orders, since they typically have holding periods of less than one day. But swing traders and position traders may find GTC orders useful.
• Fill-or-kill: These apply to limit and stop-limit orders. The broker or E-DAT will attempt to fill the order at the limit price three times in succession. If the order cannot be executed, the order is cancelled right away. Traders use fill-or-kill orders to get immediate confirmation of a trade when using limit orders.
• One cancels the other: The trader can place two orders for the same stock simultaneously. If one fills, the other is immediately canceled. Traders use this variation when they’re unsure whether a stock will rise or fall in price—with this variation, they have a chance at filling the order either way.