Investors most commonly use market orders to buy or sell shares of a company’s stock. A market order allows a desired stock trade to be executed immediately if a buyer or seller becomes available. This happens very quickly during trading hours if large numbers of investors continuously buy and/or sell a stock during market hours. However, consider the following: What if a market order to buy or sell a stock is placed when there are no immediate buyers or sellers available? What if, for example, a market order has been made to sell a stock that is currently trading at $30.00, but there are no immediate buyers available? If this is the case, the value of the stock may rise ( or more importantly, FALL ) by the time a buyer becomes available. It would be bad to place a market order to sell a stock at $30.00, expect $30.00 cash, but end up getting $25.00 on an asset due to it having a low trading volume.
How can the above circumstance be prevented? Well, that’s where limit orders come in handy. A limit order means ” expedite an order for an exact specified price, or better. “ For example, if a stock is worth $25.00, and a buyer is interested in selling it when ( or if ) it becomes worth $30.00, they could place a limit order to sell at $30.00. In that way, the share of stock would only be sold for $30.00 or higher, whichever is better at the time a buyer becomes available. Additionally, if someone is interested in buying a stock that is currently worth $28.00 when ( or if ) its value decreases to $25.00/share, a limit order to buy at $25.00 could be established. When ( or if ) the stock’s price falls to $25.00, they’d pay a maximum price of $25.00 ( or lower ), but nothing above $25.00. Limit orders ensure specificity.
Finally, there are ” stop-loss ” orders. Stop-loss orders are counterintuitive, because they go against the ” buy low, sell high ” adage…..but they can limit losses. For example, if a stock is trading at $30.00/share, and there is reason to believe that it’s price may rise rapidly upon reaching $32.00/share, a stop-loss order to buy the stock at $32.00/share could be established. There is no guarantee that the stock will perform as predicted, but a buyer can rest assured that their wish to purchase will be obligated. Likewise, the price one choses to sell a stock when a stop-loss order is made is counterintuitive, because it is an order to sell an asset if it’s value decreases. Thus, a stop-loss order to sell can minimize losses that occur if a stock’s price plummets, and it ensures that profits that have been made are locked in with some specificity.
Needless to say, there’s no need to worry about any of this if great investment decisions are made and followed up by periodic purchases over a minimum 5 to 10 year period of time ( or longer ). This simple yet very effective wealth-building practice is referred to as ” dollar-cost averaging “.
RENAISSANCE PHYSICS 