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MARKET ORDERS

A market order will guarantee that the investor's order is executed as soon as the order is presented to the market. A market order to either buy or sell guarantees the execution but not the price at which the order will be executed. When a market order is presented for execution, the market for the security may be very different from the market that was displayed when the order was entered. As a result, the investor does not know the exact price at which the order will be executed.

BUY LIMIT ORDERS

A buy limit order sets the maximum price that the investor will pay for the security. The order may never be executed at a price higher than the investor's limit price. Although a buy limit order guarantees that the investor will not pay over a certain price, it does not guarantee that the order will be executed. If the stock continues to trade higher away from the investor's limit price, the investor will not purchase the stock and may miss a chance to realize a profit.

SELL LIMIT ORDERS

A sell limit order sets the minimum price that the investor will accept for the security. The order may never be executed at a price lower than the investor's limit price. Although a sell limit order guarantees that the investor will not receive less than a certain price, it does not guarantee that the order will be executed. If the stock continues to trade lower away from the investor's limit price, the investor will not sell the stock and may miss a chance to realize a profit or may realize a loss as a result.

FOCUSPOINT

Remember that even if investors see the stock trading at their limit price it does not mean that their order was executed, because there may have been stock ahead of them at that limit price.

STOP ORDERS/STOP LOSS ORDERS

A stop order or stop loss order can be used by investors to limit or guard against a loss or to protect a profit. A stop order will be placed away from the market in case the stock starts to move against the investor. A stop order is not a "live" order; it has to be elected. A stop order is elected and becomes a live order when the stock trades at or through the stop price. The stop price is also known as the trigger price. Once the stock has traded at or though the stop price, the order becomes a market order to either buy or sell the stock, depending on the type of order that was placed.

BUY STOP ORDERS

A buy stop order is placed above the market and is used to protect against a loss or to protect a profit on a short sale of stock. A buy stop order could also be used by a technical analyst to get long the stock after the stock breaks through resistance.

EXAMPLE An investor has sold 100 shares of ABC short at $40 per share. ABC has

declined to $30 per share. The investor is concerned that if ABC goes past $32 it may return to $40. To protect his profit, the investor enters an order to buy 100 ABC at 32 stop. If ABC trades at or through $32, the order will become a market order to buy 100 shares, and the investor will cover the short at the next available price.

SELL STOP ORDERS

A sell stop order is placed below the market and is used to protect against a loss or to protect a profit on the purchase of a stock. A sell stop order could also be used by a technical analyst to get short the stock after the stock breaks through support.

 
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