Last time I mentioned the most commonly used method of buying stock: market buys. And I know, I know, you were thinking, “What does market mean? Is this a grocery store?”
Let me define what a market buy is: When the stock market is open, millions and millions of shares of stock get bought and sold. (The market is open from 6:30 a.m. to 1 p.m. on the West Coast, 9:30 a.m. to 4 p.m. on the East.) Obviously the price of the stock — buying and selling — fluctuates from minute to minute and from day to day. So when your brokerage firm enters your buy order, and it is a market order, it means the stock will be bought at whatever the current price is. You have no control over what that price will be except that it generally doesn’t fluctuate too far from itself from minute to minute. In other words, if the stock opens at $10.00/share, it’s probably not going to be $11.23 when you go to buy it ten minutes after the market opens.
But let’s say you’re worried about the price of the stock getting away from you. You have done your research (good girl!) and you feel that you don’t want to pay any more than $10.05 per share for XYZ stock. You feel that if you can get your 100 shares at $10.05 or less per share, you stand a much better chance of seeing it go up to, say, $12.00 per share, where you could sell and make a nice profit. (If you haven’t done your research, never fear. Our next topic will be just that … and you’ll learn how to discover the stocks you feel are good buys in the weeks to come.)
So you will put in what is called a “limit order” to buy the 100 shares at no more than $10.05. You are saying, in effect, “I won’t pay a penny more per share than $10.05.” Therefore, if the stock is really “hot” and immediately shoots up to $10.25, your order to buy will not be executed. (Isn’t “executed” an interesting term to use for the stock order going through? Don’t take it to heart.) If the order is designated as a “day order,” it means that if the stock price doesn’t go down to $10.05 or less on the day you put in the order, it will just disappear into the ether of unfulfilled stock orders. It will be as if it had never been entered on the brokerage Web site.
And that’s okay, because remember, you didn’t want to pay any more than $10.05 per share for it anyway.
A limit order is a way to protect your purchase of a stock just in case the price is so volatile that it goes up in price higher than you wanted to buy it.
All of this being said, I have to tell you that most of your purchase orders for stock will most likely be market orders. If you are trading in thousands of shares, a few cents’ price difference can be a big deal. But if you’re buying 95 or 100 shares and it goes up two cents more than you expected to pay when the market opened, you’re only going to be spending a few dollars more at most.
Stock sales work the same way only in reverse. When you put in a market order to sell your shares, which means they will sell for whatever the price is at the exact second they hit the computers. Remember that there’s a buyer out there waiting to buy the stock you’re wanting to sell. If there isn’t a buyer, you have bought a stock that you probably shouldn’t have bought. (What were you thinking?)
Keep in mind that the stock market works on the simple fact that for every buyer, there is a seller, and for every seller, a buyer. You can choose to get particular about the stock price or you can let the market dictate what you pay or what you are paid.
You could put in a limit order to sell your stock as well as buy it. This means you would only sell at a very specific price, say, $10.15/share, and if that price isn’t hit, your trade, again, just won’t execute.
But wait … there’s more! Come back next week and we’ll explore a few more aspects of this buying and selling that is so basic to stock investing. We’ll also start to explore how to research stocks.