Knowing how to execute an order for a stock is part of the stock basics required to trade effectively in the stock market. First you must understand how to enter an order.
Below is an example of an order screen.
The first thing to know is whether you are buying or selling. You select buy if you buying. If you own share and want to sell, you select sell.
Sell short and buy to cover, are a bit more advanced. In order to sell short, you borrow a certain amount of stock, then sell it. In order to close out your position, you will buy to cover. These trades are done on margin.
Next you will decide what stock and how many shares the trade entails. This is the “Shares” and “Symbol” part of the order. IBM stands for the company IBM. So, this order is for 100 shares of IBM.
Then, decide the price type of the order. Here is an explanation of each order price type:
This is an order to sell or buy a stated unit of stock at the price the stock is trading at currently. If you are selling, this will be the price that the stock is being bid at. If you are buying, this will be the price that the stock is being offered.
There may be differences between the quote price and the market order execution price. Your market order may have to wait in line, because market orders are executed in order of entry. If there are not enough shares being bid or offered, the market order may be executed at a higher or lower price than the bid or offer, respectively.
A limit order is an order that you set the lowest price you wish to accept as a seller, or highest price you can pay as a buyer.
A stop order becomes a market order when the stock trades at or through the stop price you indicated and set. At this point, your order gets executed but there is no certainty of the execution price.
The buy stop price should be set higher than the last transaction price while the sell stop price should be lower.
This is a combination of a stop and a limit order. Once the stock trades at or through the stop price you indicated, the stop is activated. Then the order becomes a limit order.
A market on close is a market order that is only executed on the market close.
Finally, decide if you want your order to be good for only that trading day, or Good Until Cancelled (GTC). An order that is GTC, can be executed at any time during the following trading days, until the person who created the order decides to cancel it. A day order is only good for the day it is entered on.
From there, you can enter your trade into the system.
An order does not always get filled immediately, after clicking the “Enter” button in your account. There are different ways by which an order can be filled and each has its related time delay. How an order is executed effects not only the cost of the transaction but also the stock price.
The brokerage account of an investor does not connect directly to the securities market. When you place an order, it goes to a broker, who examines the size and the availability of the stock to decide the best path to execute the order.
If the stock is traded on an auction style market such as the NYSE, the order can be directed to the floor of the stock exchange or a regional exchange. Some regional exchanges attract a fee known as payment for order flow, and it can take some time to fill such an order.
For stocks listed on the Nasdaq, without any physical location, the order can be directed to a market maker handling the stock you want to buy or sell. Brokers earn payment for order flow.
The order may also be directed to a third market maker. A broker may receive an incentive to send the order to them.
A broker may also execute your order internally. Internalization happens when the broker fills your order from the inventory of stocks the brokerage firm holds. Therefore, the order gets executed quickly.
Electronic communication networks (ECNs) automatically match buy and sell orders. They are mostly used to process limit orders because they match by price very quickly.
Your broker’s motives could determine where he sends your order for execution. The choice of your broker can affect the time taken and the final price you get for your order. However, certain laws by the SEC require all brokers to give their investors the best order execution available.