The type of order you place will determine whether you get what you want or not. Here's how to insulate yourself from price swings.
So you've decided to plunk down a chunk of your hard-earned cash to buy stock in XYZ Company. You call your broker with what you think is a simple order, telling him "I want to buy 100 shares of XYZ," but if those are the exact words you use, you may be in for a big surprise.
There can be a wide price swing between the time you give your broker an order and when he executes the sale. But there are strategies-and precise language-you can use to protect yourself. So, before picking up the phone or going online, use this primer to learn about the most common types of stock orders. Then see page 44 for common strategies to cut your losses or amplify your gains when it's time to sell.
Market, limit,stop-limit, and stop orders Do you want to buy shares at the current price, or does the stock have to reach your target before your broker makes a move? Here are methods for accomplishing both of these strategies.
Limit order. You specify your maximum price for purchasing XYZ shares. In the same example, if you had given your broker a limit order of $19, he wouldn't have been able to purchase XYZ at $21. While this type of order gives you more control, it can also add a few dollars to your cost if you're using an online or discount broker.
The limit order guarantees you won't have any nasty surprises in a volatile market, but it, too, can backfire: If you set your limit too low, you won't get a chance to own the stock at all. Say that later in the day, XYZ dropped to $19.25. Your broker still wouldn't fill the order, which would be unfortunate, if the stock shoots back up. If it went up to $25, you'd miss out on a $5.75 per share profit.
One more downside: If the stock did drop to $19, and kept heading south, your broker would have put you into a falling stock. The next option will protect you against this last scenario.
Stop-limit order. Suppose the same stock is now hovering at $18, and you think it's due to rise again, but you don't want to pay more than $22. You instruct your broker to buy but only after XYZ has first reached your stated "stop price." The instruction to "BUY 100 XYZ 19 STOP 22 LIMIT" means that once the market price goes up to $19, your broker can then enter a limit order to buy XYZ at $22 or less. Yes, you may miss out on buying XYZ at $19 or lower, but the stop-limit maneuver is your insurance that you're buying on the upswing.
In a fast-moving market, however, there is always the chance that this type of order can go unfilled if your broker can't execute it fast enough once your price target is passed.
Don't confuse a stop-limit order with a stop order.