Order Types Explained

You must be anxious by now to place a trade, but what type of order do you want to place? Do you want a market order, a limit order, stop order, etc etc…? All these order types may seem overwhelming and frustrate you, but each order type has its pro’s and con’s. Thus, it’s important to determine what your intentions are when placing a trade. For instance, do you care how much you pay per share? Do you want to set a price at which you would like to pay per share? These are the type of questions you need to consider when selecting an order type. Once you have determined what your intentions are, you can pick an order that will best help you meet your objective.

Before I start discussing order types, please keep in mind I am not a licensed stock broker. At my job I am not allowed to discuss order types whatsoever. Order types are associated with many more rules and regulations outside of the scope of this text. Please consultant your financial advisor before making any financial decisions.

Now that we have gotten that out of the way, let’s start talking order types! I will begin with the 2 most commonly used and easiest to understand order types, and slowly work my way down to the more advanced order types.
 

Market Order: is an order to buy/sell a security at its current (market) price, hence its name market order. The price you pay/receive depends on how quickly the trade is executed and the stocks demand (volume). Market orders placed during market hours (9:30-4pm) on a stock with volume are typically filled in 3/10 of a second or sooner. That’s fast! If the stock has no volume, the order will not get filled until there is volume. Another way to think of it is this; you can’t buy something when there is no seller, and likewise you can’t sell something when there is no buyer. When a market order is placed during non-market hours, the order will be good for the following trading day. Ex: I place a market order to buy GOOG on Friday at 4:01pm, the order will be filled on Monday at 9:30am.

• Pros: practically guarantees execution, regardless of the stock’s price.
• Cons: could easily over spend if buying, or receive less if selling, due to volatility.
• Application: used when the price of the stock is irrelevant to you. The stock is an absolute must have if buying, or a must liquidate if selling. It’s often used on a volatile stock to take advantage of its dramatic bullish/bearish price moves.

Wall Street Jargon: Basics

Since I will be using Wall Street jargon from here on out, it’s important you know their meanings and how they are used. I will now go over a few basic investment terms, and will discuss the more advanced terms at a later time.

• Security: refers to a type of investment. Since stocks aren’t the only securities available to trade, this term is used to describe all types of investments. This includes Mutual Funds, Options, and ETF’s, all of which will be covered later.
• Bid: is the highest price a buyer is willing to pay for a security.
• Ask: is the lowest price a seller is willing to receive for their security. The Ask is almost always higher than the Bid.
• Size: is the number of shares on the Bid or Ask and is represented as a number of Lots, rather than number of shares. Each Lot is for 100 shares, so 5 lots would equal 500 shares.
• Volume: refers to the stocks demand, both buying and selling, and displays the number of shares that have traded for that day. A stock with high volume means there are a lot of active traders, and a stock with low volume means the opposite. Thus the higher the volume, the more volatile the stock is.
• Volatility: refers the stock’s fluctuating price. When a stock is very volatile, which is usually due to high volume or higher-than-normal volume, its price tends to move up and down drastically.
• Execution: refers to an order being completed. Another word for this is “filled,” as in your order has been filled.
• Open Order: is an order that has not yet executed.
• Completed Order: is an order that has already executed.

So far these are the most basic investment terms you should know. I will be adding more terms later in case I skipped any. You may want to bookmark this particular post that way you can revisit it anytime without having to dig through the blog archive. I will finally begin discussing order types in my next post, so stay tuned.

Introduction to Trading: Investing 101

Now that you know about the types of brokerage accounts available to you, and how to choose which brokerage firm best suits your needs, let’s talk about trading! I remember when I placed my first trade I had no idea what I was doing. I ended up placing a market order and wound up spending more than I intended to (we’ll get into order types in my next post). Thus I will begin the introduction on how to place trades, and what information you will need to place one.

So once you’ve decided your ready to begin trading, assuming you’ve already opened up an account with a self-directed brokerage firm, it’s important to know the ticker symbol of the stock your looking to invest in. What’s a ticker symbol? It’s essentially the symbol of the stock you are looking to invest in. For instance, since I have an Android phone, use Google.com, MapQuest, Gmail, and Google Chrome on a daily basis, I may want to invest in Google since I use it so often and imagine several other people do as well. To find its ticker symbol, I would log into my brokerage account and look for a field that says “find symbol.” I would type in the company’s name “Google,” and the following should appear: GOOG. We have found the ticker symbol. Now that you know the symbol you can get a price quote to see at what price the stock is trading at. If you request a quote during normal trading hours the quote will be live, however if you submit the request after normal trading hours, you will either get the stock’s close price, or a pre-market/after-market price. The latter depending if the stock is actively trading during those hours.

So far we have determined how to look up a symbol, and how to get a price quote. What other information will we need? Well we need to determine how many shares you would like to buy. This is entirely up to you. GOOG is a pricey stock; it closed today at $695.25. So if you have more than $700, you can buy 1 share, but keep in mind you still need to pay a commission for the trade. Once you have determined how many shares you would like to buy, you have the task of choosing which order type you would like. Depending on your selection, you will have the ability to choose (if available) an All Or None (AON) order. We will get into order types and the “special instructions” that can come with them real soon, but before we do, we have to go over some Wall Street Jargon. In my next post I will go over some of this jargon which will facilitate your understanding of order types. Until then, hold off on placing trades, you don’t want to make the same rookie mistake I did!

Types of Accounts: Coverdell ESA vs. 529 Plans

• Coverdell ESA:This account has no authorized dealer, thus it can be held with any brokerage firm that offers it. Unlike the higher contribution limits in 529 Plan’s, Coverdell contributions are limited to $2k per year per child until the child turns 18 (subject to income limits). Balances must be disbursed by the time the beneficiary is 30 years old. Although the beneficiary can be changed to a qualified family member as mentioned in my earlier post, the new beneficiary must be below the age of 30. Unlike a 529 Plan however, qualified distributions can be made from a Coverdell for qualified elementary and secondary school expenses.
• 529 Plan: T. Rowe Price is the authorized broker dealer for 529 Plan’s in Maryland (for Virginia it’s American Funds). However you aren’t required to have it with them. You can have it with any brokerage firm of your choosing. There is a benefit, however, if you keep your 529 plan with the authorized dealer. For instance, any distributions made on the gains will be both Federally & State tax free. If the plan was held with anyone else but the authorized dealer for the state, the gains would be subject to a State tax. 529 Plan’s have larger contribution limits. Anyone can contribute up to $13k annually, with a Catch-Up of 5 years. Thus one sole-person can contribute up to $65k ($13k*5) at any one time so long as they haven’t made any contributions into the account for the past 5 years. Furthermore, contributions made to this plan can be tax deductible, depending on the state. Maryland, Virginia, and D.C. residents qualify for this deduction. The maximum amount that can be contributed to a 529 Plan in Maryland is $320k. If the beneficiary doesn’t seek a higher education, or only attends partially, the balance in the plan not used on education will incur a 10% tax penalty on the realized gains in addition to the income tax. However, the plan can be transferred to another beneficiary. Unlike Coverdell’s, there is no age limit for distributions from a 529 Plan. Thus the beneficiary can go to school at any time and still make qualified distributions.

As with most tax-deferred accounts, investments available to both accounts are typically conservative and are limited to Mutual Funds, Bonds, and CD’s, with the exception of individual stocks available in Coverdell’s. Foreign educational institutions can qualify for both plans so long as U.S. students attending that school qualify for federal financial aid. So if the school provides FAFSA for its U.S. students, you can rest assured your distributions will qualify.

That pretty much sums up the similarities and differences between both a Coverdell and a 529 Plan. I hope you have been able to keep up and understand my breakdown. This concludes my introduction to the types of accounts available out there. Now I will begin to discuss more trade related topics. Until next time!