10/2019 KIPLINGER’S PERSONAL FINANCE 71WHEN YOU ORDER A
hamburger, you could get
one that’s pink and juicy in
the middle, or one that’s a
blackened hockey puck be-
tween two buns. That’s why
waiters ask you how you
want your order. You have
several options for ordering
stocks as well. Knowing the
difference between them
can help you get the best
price when you trade—and,
in some cases, help you
avoid losses.
A market order means you
want the order executed as
quickly as possible. Market
orders can be buy orders or
sell orders. In either case,
you’re simply trading the
shares at the current market
price. If Microsoft is selling
at $140 a share, for example,
a market order to buy or sell
will probably get you the
shares near $140 per share,
most of the time.
Investors can use a stop-
loss order to limit their losses
in a market rout. For exam-
ple, suppose you had bought
100 shares of Microsoft at
$140 and it rises to $155.
Congratulations! You’re up
$1,500. But now you’re wor-
ried that if the market falls,
you could lose that entire
$1,500 and more. To miti-
gate that risk, you can put in
a stop-loss order, which tells
your broker to sell the stock
once the price falls to a cer-
tain level, called the stop
price—say, $140 in our ex-ample. At that point, your
stop-loss order becomes a
market order, and you’ll sell
at the next available price at
$140 or less. You would lose
your gain but probably not
your principal.
Many brokerages will al-
low you to use a percentage
stop order—that is, your or-
der will trigger if the stock
falls a certain percentage
below its most recent high.
(Some call this a trailing
stop order.) If Microsoft
were at $150, for example,
you could put in an order to
sell if the stock were to fall
10%, to $135 per share. If
Microsoft rose to $160, your
trailing stop would still be
10%, but the sell point
would rise to $144.The catch. The problem with
market and stop-loss orders
is that stocks can sometimes
move considerably between
the time you give the orderto your broker and the time
the trade is executed. Sup-
pose you have a stop-loss
order for $140. When that’s
triggered, your broker will
sell the stock for its next
available bid at $140 or less.
In market routs, prices can
gap down—meaning that
the next bid could be $135,
for example, or lower. With
a regular stop order, you’ll
get the next available price,
and it might be well below
your stop level.
That’s where limit orders
come in. A limit order al-
lows you to specify the
maximum price at which
you’ll buy a stock and the
minimum price at which
you’ll sell, but note that
the order won’t be executed
unless that price becomes
available. A stop-limit order
combines the protections of
a stop-loss order and a limit
order. With a stop-limit
order, you can specify thepoint at which you sell—the
stop—as well as the lowest
price below the stop that
you’ll accept, which is the
limit. Let’s say you had a
stop-loss order at $140 for
Microsoft. You could add a
limit of $138, meaning you’d
take any price from $138 to
$140. If the stock gaps be-
low that range, you’ll have
to hold on until the stock
hits $138.
Most discount brokers
charge the same commis-
sion regardless of order
type. And all brokerage or-
ders have a time element.
Most are day orders—that is,
they are good only for the
day you make them. If they
can’t be filled that day, they
expire. For trailing stops or
other, more-complex trades,
it’s best to use a good-till-
canceled order, which means
pretty much what it says.
Good-till-canceled orders
don’t necessarily last for-
ever. Your brokerage may
have a time limit—say, six
months—before the good-
till-canceled order expires,
so be sure to ask about it.
For most long-term inves-
tors in a reasonably calm
market, a market order is
fine. But stop orders can
trim your losses in a down-
turn, and using a limit order
to buy can help you snatch
bargains once the market
has sold off. ■Be Smart About How You Trade
PRACTICAL PORTFOLIO John WaggonerGiving your broker the right order can help you get the best price.
CONTACT THE AUTHOR AT JWAGGONER@
ISTOCKPHOTO.COM KIPLINGER.COM.