Trade Order – Definition, Types, Examples

Investing in stocks is considered one of the best ways to ‘put your money to work.’ Ask any billionaire or millionaire in the world how they got rich, and investing stocks are going to be on the top of their investments. It’s old school, but it is massively lucrative and efficient. It is highly beneficial if it is done right.

Understanding how stocks work and how to trade on them is the first step towards this investment path. Knowing what a trade order is, its types, and how it all matters is a critical subtopic involved.

Here’s a quick look at a trade order and its importance in stock trading.

What is a Trade Order?

A trade order is an act of buying or selling a stock at a specific price. This price usually tends to be different (higher or lower) than the original price it was bought or sold.

It is perhaps the easiest and most convenient way to execute a stock deal. However, a critical element of this execution-style is slippage, the sudden change in the price between what is expected and recorded. Depending upon the stock and its value, this change, i.e., the slippage, can be massive. And investors are suggested that they exercise caution while executing a trade order.

For example, in countries like Singapore, a limit order (a type of trade order) exists as a threshold so that an investor does not pay more for a stock than what is pre-determined. It acts as a way to level the field so that the trading is fair for all.

There are many types of trade orders; the following is a list of them.

Types of Trade Orders

1. Market Order – The selling and buying are based on the current market price. The individual cannot control this price, and it has a high risk of slippage.

2. Limit Order – Trading at a better price than the original. Involves buy limit order and sell limit order where buyers and sellers can assign a lower and upper threshold, respectively.

3. Stop Order – Enables trade execution at a designated price to minimize the loss in a bullish market/

4. Trailing Stop Order – Percentage change in the price rather than the actual assignment of a value.

5. Stop-Limit Order – Combination of limit and stop orders where buyers and sellers can assign two values – for limit and stop.

An Example Scenario Using a Limit Order

A limit order is one of the most used types. Let’s take the example of a buyer placing a buy limit order of $10 on an individual stock’s value. This limit is placed for a specific stock.

Now, in this case, the order will be executed only if the stock’s price drops to $10 per share or below. Anything above that will lead to no activity. The same is true for a sell limit order where a seller will sell stocks only if it hits a certain price or higher.

Such a system helps both buyers and sellers minimize losses and stay on top of their portfolios. Most investors use this trade option on stocks that are a lost cause. They know that it will not perform well, so they plan to sell it if it hits a certain level that will still gain them profits.

A good way to get a better understanding of these types of trade orders is to try a demo, illustrating would help you understand the investing concept better. You can also log in to any trading platform and start using these trade orders in real-time.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes