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So here’s to a great financial start to 2020, if you are unfamiliar with M1 Finance, it is an investment platform that can automate investing. It allows for super flexible portfolio construction with their pie and slice concept, and allows you to buy fractional shares of companies that most of us could otherwise not afford to invest in (think Amazon over $1,800 per share). Here is more about M1 and some of their features:
When you first consider investing into the stock market, there are so many nuances and verbiage surrounding the stock market that seems foreign. It won’t take very long once you begin your research, before you figure out there’s a lot to learn. One thing in the very beginning once you open up a retirement account like an IRA or a Taxable Brokerage account that may also be unsettling is the many different order types that there are when buying or selling stocks. In this article I try to give you some insights on what some of these order types are, and propose a way to practice using some of these without using real money, in what is called paper trading.
Let’s begin by looking at some of the most common order types:
Market Order: an order to buy or sell a Stock or ETF immediately. This type of order guarantees that the order will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price. However, it is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed.
Limit Order: an order to buy or sell a Stock or ETF at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Example: An investor wants to purchase shares of ABC stock for no more than $10. The investor could submit a limit order for this amount and this order will only execute if the price of ABC stock is $10 or lower.
Stop Order (or Stop-loss Order): an order to buy or sell a Stock or ETF once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
So looking at these three order types is a good starting place, and most beginning investors likely will mostly use Market and Limit orders initially. Market orders work just fine on Stocks or ETFs that have a lot of liquidity (a large volume of buys and sells) meaning a market order will usually be filled very close to the current trading price of the asset. On the other hand, if you are buying a lessor known Stock or ETF that has low liquidity (a small volume of buys and sells) a market order might fill at a much higher price than the asset is currently trading so proceed with caution and keep this in mind. Limit orders are the safest way to purchase a Stock or ETF because you have full control over how long the order stays open for and the price that you desire to purchase the asset at. Limit orders also require a level of patience and may require you to close the order and reopen it at a higher price to actually get the order to fill if the Stock or ETF is going up in price so keep this in mind.
Lastly, I will briefly cover a Stop Order (or Stop-Loss Order). These types of orders are used in a defensive manner to prevent loss of capital, if one thinks there is a market crash on the horizon. Another time a Stop Order could be used is when you have held a Stock or ETF and seen substantial gains and want to lock in gains in the event of a big drop in price.
Example: you purchase stock A at $100 and after 5 years the price has risen to $250. You could set a Stop Order at maybe $225 so that is the price drops sharply you would at least keep a profit of $125 ($225 minus $100) per share.
I think this gives you a good overview of what these order types are and how to use them, now if you would like to practice using them I would suggest opening an account with a brokerage that has paper trading. A paper trading account is setup with a set amount of paper money (typically at least $100,000) that can be traded against real stock prices during the hours that stock market is open. This will give you a good opportunity to familiarize yourself with how to execute Market Orders and Limit Orders and see some results without actually using real money at first. A couple great free trading apps that have this option are Webull and Moomoo. Webull is a trading platform that has multiple account types including retirement accounts and have announced they will be rolling out options trading soon (they also announced that options trading will be free). Moomoo is a trading platform that only has taxable accounts but does already have free options trading with level 2 market data. Another great benefit to both of these trading platforms is that when you sign up for the account you get a FREE STOCK and you get another FREE STOCK when you fund your account (with $100 or more). They both are great and both have paper trading accounts!
JMac Investing 