Of all the aspects of trading and investing, this is one of the most simple and, potentially, tricky. It is also (in my humble opinion) one of the most fun. The reason it can be tricky is because of all the various ways to place trades. For the sake of this post, however, I am going to keep things simple.
Two of the most popular ways to place an order are through either Market or Limit orders. A Limit Order is simply the price at which you are willing to purchase a security. If, for example, XYZ’s stock is trading for $10.00 per share, and you feel a fair price for the stock would be $9.85 per share, you would place a limit order for the stock at $9.85. The order will sit idle until (i.e. if) XYZ’s stock price falls to $9.85 (or lower).
A Market Order, on the other hand, will be filled at the current market price (i.e. the current Ask price) once the order is placed. For example, if you believe XYZ’s stock price is attractive and, at the time, fairly valued, then you may want to place a market order to ensure the order is filled right away. If XYZ’s stock price is trading for $10.00 per share, a market order will generally be filled somewhere around the upper nine to ten dollar per share range. The price at which the order is filled will, however, be dependent upon various conditions (e.g. market conditions, major news events, the speed at which your brokerage firm is able to fill the order, etc.). Generally speaking, you will want to utilize market orders whenever you want a trade to be filled fast (e.g. following a major news event that is certain to propel a company’s stock price higher — or lower).
As I mentioned, this is the simplified version of placing trades. There are many other types of trades and trading mechanisms available; however, the two most common for most investors are limit and market orders.
