Many novices want to enter the U.S. stock market and get high returns on investment, but they are troubled by how to buy U.S. stocks, how to open an account, and what types of trading orders there are. This article will take you to a deeper understanding of the basics of U.S. stocks and analyze the types of trading orders. I believe that you will be less confused after reading the following content.
Open a suitable investment account
There are many types of accounts you can use to invest in U.S. stocks, such as cash accounts, margin accounts, retirement accounts, and education savings accounts. Before you start investing, you must deposit the funds you need to buy stocks.
7 Common Trading Order Types for Buying US Stocks
Before learning how to buy US stocks, let’s first understand the types of trading orders and what roles do these 6 different orders play?
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Market order: the most common type of transaction in the market
When learning how to buy U.S. stocks, the most common type of trade is a market order, which is an order to buy or sell a stock at the market price. The transaction price is usually the same as or close to the quoted price at the time of placing the order, mainly depending on the speed of the transaction and the market activity of the stock.
Limit order: A type of transaction that allows you to buy or sell within a specific price range.
A limit order for buying US stocks is a trading instruction, which is an order to buy a specific number of stocks at a price equal to or lower than a specified price, or an order to sell stocks at a price equal to or higher than a specified price (called a limit price). This type of order can ensure that the investor will not buy the stock at a price higher than the specified price. Similarly, if the market price does not reach the specified price, the order will not be executed.
Example: Suppose Frank submits a buy limit order at $2.40 when the market is trading at $2.45. If the stock price drops to $2.40, the buy limit order will be automatically executed. Suppose Frank submits a sell limit order at $5 when the market is trading at $4.25. If the stock price rises to $5, the sell limit order will be automatically executed.
Stop loss order: protecting investors’ profits and avoiding losses
The selling price set by the stop-loss sell order is lower than the current market price. It can protect the investor’s current profits or avoid further losses due to a continuous decline in prices. This type of order will automatically become a market order when the market price reaches or is lower than the specified price. On the contrary, the purchase price specified by the stop-loss buy order is higher than the market price. When the market price reaches or is higher than the specified price, the order will be executed.
Example: A stop-loss buy order specifies a buy price above the market price. If Frank submits a stop-loss buy order for $20 when the market is trading at $17, the order will be converted to a market order when the market price reaches $20 or above, and the stock will be bought at the next available price. If Frank owns ABC stock trading at $50 and wants to protect the stock from a sharp decline in the future, Frank can submit a stop-loss sell order for $48 to sell Frank’s ABC position. If the market price of ABC stock reaches $48 or below, the order will automatically be converted to a market order and sell the stock at the next available price. If the next available price is $47.90, the order will be sold at this price. A stop-loss sell order can protect investors’ current profits or prevent losses from increasing due to a continued decline in prices.
Stop-limit order: a trading instruction that includes stop loss and limit price
An order that combines the features of a stop order and a limit order. When the stock price reaches the specified stop price, the order will be executed at the specified price (or better). Once the market price reaches the specified stop price, the limit stop order will be converted into a limit order to buy or sell the stock at the specified price (or better).
Example: Frank is currently trading at $40. An investor wants to buy the stock while it is trending up. The investor submits a buy stop limit order with a stop price of $45 and a limit price of $46. If the market price of ABC exceeds the stop price of $45, the order will automatically convert to a limit order. As long as the stock is trading below $46 (the limit price), the order will be filled. If the stock is trading above $46, the order will not be filled. A sell stop limit order is similar to a sell stop order, but the order will be filled at the limit price. For example, Frank submits a sell stop limit order with a stop price of $47 and a limit price of $45. If the stock is trading at or below $47, the order will become a sell limit order at $45. If the stock price is below $45 before the Frank order is executed, the order will only be executed if the stock price reaches $45 again.
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Trailing Stop$: Special stop-loss order based on price
A special type of stop-loss order. When the security price moves in a favorable direction, the stop-loss price of this order tracks the price of the security based on the stock price and protects the investor from sudden losses.
Example: Frank buys XYZ stock at $10. He doesn’t want to lose more than $2 on the stock, but still wants to take advantage of the stock’s rise. He also doesn’t want to have to watch the stock price to lock in a profit. He can place a trailing stop order on XYZ stock, which will sell the stock if the market price drops below $2. The benefit of a trailing stop order is two-fold. If the stock price moves against Frank, the trailing stop order will sell the stock if the price reaches $8.00, preventing further losses. But if the stock trades at $20, the trigger price of the trailing stop will also increase as the stock price rises. With the stock trading at $20, the trailing stop order will be executed if the stock trades below $18. This helps him lock in maximum profits as the stock price climbs.
Trailing Stop %: Special stop loss price order based on percentage
Trailing Stop %: A special type of stop-loss order that tracks the security’s price as a percentage of the stock price and protects investors from sudden losses when the security’s price moves in a favorable direction.
Example: Let’s say Frank buys a stock at $10. Frank can place a 15% trailing stop order (a same-day or 90-day effective order) to protect Frank’s principal. This means that if the stock drops by 15% or more, the trailing stop order will be activated, protecting Frank’s losses. Let’s say the stock price reaches or exceeds $14 in the next few months. Frank is happy about the stock’s appreciation, but he is also worried that the stock price may fall back. If the stock price drops 15% to $11.90 after reaching $14, the 15% drop will trigger the trailing stop order. Let’s say the order is executed at $11.90, and your profit is 19% (from $10 before to $11.90 now).
Conditional Order: A special type of order that is executed based on changes in stock prices.
A conditional order for buying US stocks is a special type of trading instruction used to execute a trade under certain conditions. Unlike other types of orders, a conditional order does not execute a trade immediately at a specified price or market price, but only when certain conditions are met. Conditional orders can be used to implement a variety of trading strategies, such as trading using technical indicators or market events, or limiting trading risk when the market is volatile.
