What follows is a transcript of the video above.
There are three types of orders: market, step, and limit. To remember the difference, try this:
Market order: does not have a price
Stop order: has the word “stop”
Limit order: has a price but not the word “stop”.
Those examples are a bit of a cheat for remembering market order limits. That is how you know if you are looking at a market order, a limit order, or a stop order.
- If it has the word “stop,” it is a stop order.
- If it does not have a price, it is a market order.
- If it has a price, but not the word “stop,” that makes it a limit order.
An example here is buying you 100 shares of Microsoft at $92. Forgetting about types of orders, you are buying the shares for $92. Will you pay $93? No, just say you will pay $92. Would you pay 91? Well, yeah, you would pay $91. The point is this is the exact same thing. Buy limit for 100 Microsoft at $92, but nobody talks that way, someone would say, “buy 100 shares of MSFT at $92”.
If you have negotiated to buy or sell anything in your entire life, such as rent an apartment, you said, “I’ll pay you $2,500 a month in rent.” Well, that is a limit order. If you said, “No, only selling for $3,000 a month,” that is a limit order. So, “Buy this car for $12,000,”, that is a limit order; it is the price you are willing to pay.
Let’s say a person owns 100 shares of Microsoft and the market price is $150. That person calls their rep and says, “Hey rep, if the stock goes back down to 100, get me out.” That means you want to sell. This is a stop order, yet again, nobody talks that way. Nobody ever says, “Hey rep, sell stock at 100.” They just say, “If it gets back down to this price, get me out.” For example, Tesla is in a position where a lot of investors are doing some profit taking. So, maybe you bought the stock at $50, and now it is worth $700. You are telling your rep, “Hey rep, I think to still own the thing. If it goes to $600, let’s just get out of the position.” That is a stopper, literally to stop losing.
A sell stop protects a long position; you sell to get out. A buy stop is getting out of a short; it protects a short position. In which direction do you have to protect a short position? “Above the market” protects short positions placed above the market.