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How to Buy a Stock (Order Types Explained)

NEW YORK ( TheStreet) -- What's the difference between a market order and a limit order? What does "buy to cover" mean? Understanding how to pull off your first trade can be a little intimidating (and confusing). Let's say you've done your stock homework, you think you've found a winner, and now you're dying to put your new brokerage account to good use and start trading, but you're not quite sure how to do it. Sounds like you might need a little lesson in executing that first trade.

Let's get started.

Understanding Execution

Trade "execution" is just a fancy way of referring to a transaction. When you buy or sell stock, you're executing a trade. To "trade," in investing lingo, usually refers to a particular type of investing strategy, so qualifying your use of the term "trade" with the word "execute" lets other investors know that you're talking about a specific transaction.

How Long Does Execution Take?

The actual time it takes to execute your trade can vary from broker to broker and market to market. Generally speaking, trades are, in essence, instant. As a typical investor, you won't notice a particularly perceptible or painful price difference in the time between placing your order and its execution. (The SEC requires that all brokerage firms provide documentation quarterly to the public about the routing of their client orders. These reports are available from the SEC or from your broker.)

When you do place your order, your broker will most likely route your order through their complex trading computer network to get a hold of your shares. In some cases, your order will never leave the broker -- your brokerage firm might want to clear out shares of the company you're buying from its inventory.

How Do You Want to Trade?

You've got a few options when it comes to trading stocks. Buying and selling are the obvious choices. But there are other ways to trade, too: selling short and buying to cover.

Selling short can be done when you have a margin account with your broker. Essentially, you borrow shares of a particular stock and sell them, hoping that the stock will depreciate in value, leaving the difference between the selling price and eventual repurchase price in your pocket. Buying to cover is the term for that eventual repurchase; it closes out a "short position" in a stock.

But since we're talking about your first trade here, it makes sense to focus on buying stocks. Besides, selling short and buying to cover are more advanced investing topics that you'll definitely want to avoid until you're ready ( "What Do I Need to Know About Shorting Stocks?" ).

5 Ways to Place Your Stock Order

There are five different types of stock orders that your broker will likely let you use. They are:

  1. Market Order
  2. Limit Order
  3. Stop Order
  4. Stop-Limit Order
  5. Trailing Stop Order

Market Order:

A market order is a request to purchase or sell a stock at the current market price. Market orders are pretty much the standard stock purchase order. One thing to keep in mind with a market order is the fact that you don't control how much you pay for your stock purchase or sale; the market does. This shortcoming can be met with a limit order.

Limit Order:

This is an order that executes at a specific price that you set (or better) and can be open for a specific time period. While a limit order will prevent you from buying or selling your stock at a price that you don't want, if the price is way off base, the order will never execute. It's important to note that some brokers charge more for limit orders. Why? No execution means no commission.

Stop Order:

This is a market order that is triggered once your stock reaches a specific target price, the stop price. Stop orders may also be called stop-loss orders, because they help investors put constraints on their losses.

Stop-Limit Order:

This is identical to the stop order, except for the fact that a limit order is triggered once your stock reaches a specific target price.

Trailing Stop:

Basically, this is a stop order based on a percentage change in the market price.

When you put an order in to your broker, you can choose how long the order stays open. By default, orders are day orders, meaning that they are valid until the end of the trading day. Good-'til-canceled orders remain open until you actually go in and cancel them.

How to Cancel an Order

There might come a time when you put in an order that you decide you don't want to go through with. If the order has not yet been executed, canceling it is usually as simple as selecting the "cancel" option online or calling your broker. Remember that once the order does go through, if you're not happy with your investment, you can't take it back to the store it came from. So make sure that you seriously consider all of the implications involved in placing a stock order.

What About After-Hours Trading?

In recent years, after-hours trading has opened its doors to individual investors. With the lower trading volumes and different conditions that investors encounter in after-hours trading, it's not advisable for you to fiddle with after-hours trading as a new investor until you really know what you're doing.

(To learn more about the after-hours market, check out these articles on TheStreet.com: An Extended-Hours Trading Primer , Booyah Breakdown: After Hours and Will I Get Burned in Extended-Hours Trading? .)

Happy investing!

Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.

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