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Know Your Limits

Know Your Limits

Understanding Risk

Know Your Limits

If you want to buy a stock at a certain price, or sell a stock at a certain price, it's easy: Just set your limits. There are three types of orders you can place when buying or selling a stock:

Market Order

The most common type of order is a Market Order, which tells the broker to buy or sell your shares at the best available price. That means, in a volatile market, the price you get could be higher or lower (sometimes significantly) that the price at the time you placed the order.

Limit Orders

Limit Orders include a specific price parameter the broker is expected to follow. For example, if you want to buy ABC stock which is currently selling at $30 per share, and you don’t want to pay more than $32 per share, you could set a limit. If the stock price moves above $32, the broker will not buy the shares. The danger with limit orders is that, in a fast moving market, you could miss an entire upside move (i.e., the share price shoots up to $40 per share).

Stop Loss Order

If you are concerned that your stock could plunge in a down market, you can limit the downside risk by placing a Stop Loss Order. A Stop Loss tells the broker that, once the stock falls to or through a specific price, it is to be sold. For example, your stock is currently trading at $25, but you want to limit your downside risk to 10 percent; so you set a Stop Loss for $22.50. When the share price reaches $22.50, your Stop Loss Order changes to a Market Order and the stock is sold at the next available price.

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