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Stake Academy ASX: Order Types

Entering and exiting positions effectively is key to executing a trading strategy. Stake provides a number of order types to place trades with precision. Here’s how to best use market and limit orders.

There’s more than one way to place a trade. A key to any good portfolio is effective order management. In this edition of Stake Academy, we open the trader’s toolbelt and look at all the order types available to Stake traders to help fulfil your investing plan.

Market Orders

A market order will immediately fill at the best available price. Enter the number of shares or the dollar figure you’d like to trade and Stake will execute your trade at the best price.

Each stock has a bid (maximum an investor is willing to pay) and an ask (minimum price an investor is willing to sell). Trading occurs when a bid matches an ask. To execute a marker order, a bid is placed at the ask price, instantly filling.

When to use:

  • To enter a stock immediately without risking your order not being filled.
  • Best used for highly-priced, highly liquid stocks.

 

For example, a company you are watching announced a positive deal with a US-based big tech company. The stock is starting to rally and you want to get into the stock as soon as possible. A market order will fill at the best available price immediately. Within seconds, your trade is executed and the stock is in your portfolio.

Now, since a market order involves meeting the market’s ask price, it is best used for high liquidity stocks. High liquidity stocks are those with a high volume of stocks changing hands at multiple prices. These are the biggest names in markets. The spread between the bid and ask is usually very small.

Entering a market order for a low liquidity stock (low volume, micro/small-cap) could cause you to pay higher prices for the stock (the bid and ask are far apart). 

Say a stock has a bid of $0.10 and an ask of $0.11. A market order would fill at $0.11. Immediately, your shares are 10% away from the nearest bid. A limit order can help execute your order more precisely.

 

Limit Orders

A limit order will only fill at your specified price or better. You enter the price you are willing to buy or sell a stock at, it will only fill at this price. For instance, in the above example, a limit buy at $0.10 will only fill at $0.10 or lower. Your order will only match when the ask falls to $0.10.

When to use:

  • To get exactly your desired price for a buy or sell.
  • Best used in low priced, low volume stocks.

 

For example, a small lithium company could have a bid at $0.10 and an ask at $0.105. A market order would fill at $0.105 but this is 5% off the current bid. A limit-buy at $0.10 would only fill at your specified price.

When placing a trade, investors will also have the option to choose whether the order will cancel at the end of the day or after 30 days. In low volume stocks, a limit order may not fill for some time. This optionality gives traders more control of their investing strategy. 

A limit order can be cancelled while it is still pending (waiting to be filled). Note that sometimes only a portion of a limit order may be filled if there is not enough volume to fully complete the order. You will only be charged brokerage once no matter how long a single order takes to fill. 

The Minimums 

The ASX enforces a $500 minimum order (excluding brokerage) on your first purchase of a stock. This is known as the minimum marketable parcel. Once you own a share, you can buy or sell any amount.

For example, your portfolio consists of Qantas, Zip and Fortescue. You can buy or sell any amount of those stocks. If you were to add Westpac to your portfolio, you’d have to purchase $500 worth. Once you own the stock, you can buy and sell any amount you need. If you were to sell your whole position, you would need to purchase $500 to re-enter the stock again.

It’s also worth noting that only whole shares can be traded, no fractionals. 


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