Tuesday, May 12, 2009

Stop Orders vs. Limit Orders

As a beginner investor, I just learned a valuable lesson. I purchased my first shares of stock a few months back and they have actually been performing quite well. Ford (F), which I started buying at $2.19, dropped a little today from over $6.08 to $5.26. Feeling adventurous, I tried to place a more advanced type of order to sell my shares if the stock dropped below my determined price of $5.00. I accidentally placed a Limit Order instead of a Stop Order, and since Ford stock was already above the limit, it sold all my shares instantly at $5.26. After I realized my mistake, I bought them all back, but ended up paying $5.46 per share plus commission fees. Since I only have a small amount invested it only cost me about $30.00, but I will never make that mistake again.

Stop Orders
As mentioned above, a Stop Order is used to "buy or sell a certain quantity of a certain security if a specified price (the stop price) is reached" according to investorwords.com.

[Example from Investopedia.com] If you own stock ABC, which currently trades at $20, and you place a stop order to sell it at $15, your order will only be filled once stock ABC drops below $15.

Limit Orders
Are used to "buy a specific quantity of a security at or below a specific price, or to sell it at or above a specific price (called the limit price) according to investorwords.com.

[Example from Invetopedia.com] If you want to buy stock ABC, which is trading at $12, you can set a limit order for $10. This guarantees that you will pay no more than $10 to buy this stock. Once the stock reaches $10 or less, you will automatically buy a predetermined amount of shares. On the other hand, if you own stock ABC and it is trading at $12, you could place a limit order to sell it at $15. This guarantees that the stock will be sold at $15 or more.

I really like using Tradeking.com because it makes everything so easy, but next time I won't just click on things without knowing exactly what I'm doing.

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