Water Well Journal

April 2016

Water Well Journal

Issue link: http://read.dmtmag.com/i/655200

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Page 43 of 67

Y ou've decided to buy or sell a stock. That's a simple transaction—much like going into a retail store, picking out a product, and saying, "I'll take it." Right? Well, no. Unfortunately it isn't that simple. There are many ways to buy or sell a stock—and not knowing about them could be costly for you. Here's a brief rundown of the most common types of orders accepted by most brokers and what you should know about each of them. Market Orders The most commonly used buy or sell order is a market order. When you tell your broker to buy or sell "at the market," you are not specifying a price. Your order will be executed immediately at the then current price. Market orders are the easiest and quickest type of order to give. But there is a disadvantage. You won't know the price until the transaction is completed. Market-Not-Held Orders These are similar to market orders—but don't require the order be executed as soon as possible. A market-not-held order allows floor brokers to take more time and use discre- tion if they think they can get a better price by waiting to see where the market price is heading. This type of order is always placed at the customer's risk since it places decision making in the hands of a floor broker. Limit Orders When you give a limit order to your broker, you specify the maximum price you're willing to pay for a stock or the minimum price you're willing to accept for a stock you want to sell. Once the price reaches the limit you have specified, the order will normally be filled at that price or better. Setting limit orders can be tricky and may result in your order not being filled. For example, consider a company cur- rently trading for $26 that you want if it trades down to your maximum price of $24. It could be costly if the stock trades down to $24.25 and then rises sharply, leaving your order un- filled. Sophisticated investors use various techniques to help avoid that scenario. Some wait to put in their limit orders until the stock trades down close to the price they're willing to pay before putting in their orders. Others will add a penny to their buy limits, say $25.01 instead of $25.00, or subtract a penny from their sell limits, thus getting ahead of the usual cluster around even amounts. In any event, limit orders can sometimes produce some unexpected results. Stop Orders When you use a stop order, you're telling your broker to buy or sell a stock once it reaches the price you specify. Once it reaches that price, the order automatically becomes a market order and will be executed at the next available price. Stop orders are often used to protect against a loss or to preserve a gain. For example, you might have a nice gain in a stock currently selling around $40. You could place a stop order to sell that stock if it drops to $32 (a drop of 20%). If the stock continues to rise in price, you'll still participate in the gain. But then if it declines by 20%, it will be sold, protecting you against a further decline. You need to remember stop orders become market orders once the stop price is reached. So, your order could be exe- cuted below your stop price in a rapidly declining market. Stop orders guarantee execution, not price. Stop orders sound like limit orders, but there is a differ- ence. Sell stop orders must be placed below the current market price and buy stop orders above the current price. Stop-Limit Orders To protect against the disadvantage of limit orders de- scribed earlier, you may want to consider stop-limit orders. Unlike stop orders which automatically become market orders once the trigger price is reached, stop-limit orders restrict the orders to the price specified at the time the order is placed. A buy stop-limit order becomes a limit order executable at the limit price or better when the stock trades at or above the stop price. A sell stop-limit order becomes a limit order executable at the limit price or better once the stock trades at or below the stop price. While stop-limit orders eliminate the possibility of getting a worse than expected price for your trade, your order could WILLIAM J. LYNOTT YOUR MONEY BUYING AND SELLING STOCK There are a number of ways to do it. Make sure you know your options. waterwelljournal.com 42 April 2016 WWJ There are many ways to buy or sell a stock— and not knowing about them could be costly for you.

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