To help educate investors on some basic trading definitions, below is a brief summary of the terms traders use on a day-to-day basis.
Market Order. An order sent immediately to the floor for execution without restrictions. It executes immediately at the current market price and has priority over all other types of orders. It is executed at the lowest offering price available. Provided the security is currently trading, a market order is guaranteed to be executed.
Limit Order. A limit order ‘limits’ the purchase or selling price to an exact price (i.e. if MSFT is trading at 35.55 currently, a limit order can be placed at 34.00 and the trade will not be executed until MSFT were to trade at 34.00 or lower).
Short Sale. A short sale is a technique to profit from the decline in a stock price.
How does a short sale operate?
- The short seller borrows stock from a broker/dealer to sell at market.
- The investor expects the price to decline to buy shares at a lower price and replace the borrowed stock at a later date.
- The investor is obligated to replace the borrowed shares at some point (so there can be an unlimited amount of risk). Note: the reality is that a margin call would take place prior to infinite losses occurring
Stop Order. The stop order becomes a market order once the price hits a certain level. Note: a stop ‘limit’ order can set a certain stop price, but will not operate as a market order.