XS Online Trading Courses

The Mechanics of Stock Trading

In this lesson, we will examine the various types of orders used in stock trading, explore the factors that influence stock prices, and highlight the critical role brokers play in executing trades.

Understanding these concepts is essential for anyone aiming to navigate the stock market with confidence and clarity.

Stock Trading Orders Explained

In stock trading, the type of order you place can significantly impact your trading outcomes.

Here, we explain the most common types of orders.

Market Orders

A market order is the simplest type of stock trading order. It allows you to buy or sell shares immediately at the current market price. It's primarily about speed and execution, not price.

Therefore, market orders:

• Are executed quickly

• Prioritize the completion of a trade over getting a specific price.

• Are subject to current market conditions, meaning the final execution price may vary.

Imagine you want to buy shares of Company X.

The current quote shows a bid price of $50 and an ask price of $50.10.

• If you place a market order to buy 100 shares of X, your order will be executed at the nearest available price

• In this case it is likely around $50.10, the current ask price.

However, if X is a highly volatile stock or if there's a rapid market movement, by the time your order is executed, the price might be slightly different.

For instance, it might get executed at $50.15 per share. This variance is a factor to consider with market orders, especially in fast-moving markets or for stocks with low liquidity.

Limit Orders

A limit order is a type of order to buy or sell a stock at a specific price or better. Unlike market orders, limit orders give you control over the price at which your order is executed.

Thus, limit orders specify the maximum price for a buy order or the minimum price for a sell order.

However, in limit orders, execution is not guaranteed, as the market price may never reach the limit order's specified price.

For example, let’s suppose Company X's stock is trading at $100, but you believe it's a good buy at $95. You can place a limit order to buy the stock at $95. This means your order will only be executed if the stock's price falls to $95 or lower.

Stop Orders (Stop-Loss orders)

A stop order, also known as a stop-loss order, is an order to buy or sell a stock once it reaches a specific price, known as the stop price.

Once the stop price is reached, the stop order becomes a market order. It is primarily used to limit a loss or protect a profit on a stock holding.

Thus, the order is inactive and will not be executed until the stock reaches the stop price.

Imagine you own shares of Company X, which you purchased at $100 per share. The stock's price is rising, but you want to protect your investment against a potential downturn.

You decide to place a stop order at $95. This means if X's stock price falls to $95, your stop order becomes a market order, and your shares will be sold at the current market price to limit your losses.

Stop-Limit Orders

A stop-limit order combines the features of a stop order and a limit order. It consists of two prices: the stop price and the limit price.

This order will only execute at a specified price (limit price) or better after a given stop price has been reached or passed.

So, once the stop price is triggered, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

For example, if you own shares of Company X at $100 and set a stop price at $90 with a limit price at $89.50, your stop-limit order activates at $90. It sells only if the price is $89.50 or higher. If the price drops below $89.50 before execution, the order remains open.

Understanding Stock Prices

Stock prices are influenced by many factors:

• Market Forces: At its core, stock pricing is influenced by supply and demand. High demand for a stock increases its price, and vice versa.

• Company Performance: Earnings reports, financial health, and a company's growth prospects directly impact its stock price.

• Economic Indicators: Interest rates, inflation rates, and economic policies can affect stock prices.

• Market Sentiment: The general mood and perceptions of investors, often driven by news and world events, can sway stock prices.

Understanding these factors can aid in making informed investment decisions.

Trading Stocks with a Broker

Understanding the role of brokers in stock trading is essential. A brokerage account enables individuals to buy and sell investment securities like stocks, bonds, and forex.

Held at a brokerage firm, this account serves as a bridge between investors and the stock market.

How to Choose a Broker

When selecting a broker, you must consider the following factors:

• Regulation & Security: Ensure the broker is regulated by a reputable financial authority to protect your funds.

• Trading Fees & Commissions: Compare commission structures, spreads, and hidden charges to find a cost-effective option.

• Available Investment Options: Check if the broker offers stocks, bonds, forex, ETFs, and other securities that match your investment goals.

• Trading Platform & Tools: Look for a user-friendly platform with essential tools like charts, indicators, and research resources.

• Order Execution Speed: Choose a broker known for fast and reliable order execution to minimize slippage.

• Account Types & Minimum Deposits: Consider brokers with account options that fit your budget and investment style.

Moreover, if you're a beginner, prioritize brokers that provide educational materials, webinars, and demo accounts.

Lesson Summary

• Market Orders: Execute immediately at current market prices, focusing on speed over price accuracy.

• Limit Orders: Allow setting a specific price for buying or selling, offering price control but no execution guarantee.

• Stop Orders (Stop-Loss Orders): Activate at a specific price and become market orders, used for loss prevention.

• Stop-Limit Orders: Combine stop and limit order features, executing only within a specified price range after a stop price is hit.

• Stock prices are driven by market forces, company performance, economic indicators, and market sentiment.

• Brokers act as intermediaries for market access, executing orders, and providing trading resources and advice.

In this lesson, we covered the essential aspects of stock trading orders, the factors influencing stock prices, and the importance of brokers in the trading process. The next lesson will go over the fundamentals of stock analysis.