Share trading or stock trading is not like shopping at your local supermarket, where prices are set. Because investments are priced in real time through active bidding between buyers and sellers, there are techniques to buying and selling shares. Share trading for dummies will show you the five main ways to buy or sell shares online when dealing with investments.
This is the most common type of order in share trading. You tell your broker to sell your shares at the best price or to buy shares at the current price. Because these types of orders are executed almost immediately and are quite straightforward, they typically have the lowest commissions.
Very easy to understand as well, you tell your broker the price at which you are willing to buy or sell and only once the shares reach that limit, will you buy or sell shares. Quickly imagine, you own 100 shares in ABC company which are trading for R50 a share. The stock has been on a tear but, estimate it will fall to R30 a share. You could sell the stock right away with a market order, but you wouldn’t want to miss out on the chance of the stock rising in case you’re wrong. A limit order would let you instruct your broker to sell the stock if it fell to R45 a share.
Warning: Limit orders are filled only at the price you set. Should the stock fall further than the price you set the broker might be able to sell only some of the shares or in some cases, not any.
Almost the same as limit orders, stop market orders let you set a price you want to sell or buy shares at. Once the shares hit the price you set, the order converts into a market order and executes right away.
Same scenario as above with ABC company. By this time, you enter a stop market orders for R45. And again, you find that the stock plunged instantly to R25. This time, though, all your stock would have been sold. But, your online broker will sell the shares at whatever the price was the moment your order converted to a market order, which in this case could have been R25.
Stop-limit orders are customizable. First, set the activation price. When that price is a hit, the order turns into a limit order with the price you’ve set.
So, ABC company is trading at R50 a share when you enter a stop limit order with an activation price of R45 and a limit price of R35. Again, you wake up to find that the stock dropped suddenly to R25. This time, your broker would turn your order into a limit order after it fell below R45.
Should the stock fall to R35, the broker would try to fill the orders at that price if possible. But, unlike with stop markets order, you wouldn’t dump all the stock the moment it fell as low as R25.
Regular limit orders either expire, or they’re executed. Trailing stop orders get around this problem by telling your broker to sell the stock if it falls by a certain number of points or a percentage.
Helpful tip: Should you buy or sell individual stocks, trailing stops can be a good idea. Even before you buy stock, you should have an idea of how far you’ll let it fall before you can cut all your losses. Some investment professionals suggest never letting a stock fall more than 10% below the price you paid. If this sounds like a good idea to you, a trailing stop could be your best friend.
Warning: There are some brokers that charge extra for limit orders, so check the commission fees before you start trading online.
These are the main five ways to do share trading for dummies. For more information, take a look at Share Trading in South Africa.