Types of Trades

The two most common types of trades that occur within the stock market are buying and selling shares.  These market orders are the basic types of transactions that are most commonly thought of when the topic of investing is brought up.  There is little control given to the investor in these types of trades.  Once an order is placed, they have no choice at what price it is filled.  Since these are the simplest types of trades, the transaction fee for fulfilling them is relatively low.  The market, however, is not all so simple.  There are several other types of trades that occur.
               
The first of these transactions is called a buy-limit order.  This is when a trader specifies a set price at which he will buy shares.  If the shares are more expensive, the broker will not execute the trade.  It will only be fulfilled if the market price is at or lower than the specified price.  This is great for traders who know what price they are interested in since it makes the transaction more automatic.  A time limit is placed on the order detailing how long it will be left open.
               
There are also sell-stop orders that stipulate at what price a trade will be closed.  Like a limit order, a predetermined price is set for these trades.  Once shares fall to that price, the shares are sold by the broker.  Again, this is an automatic way to cut losses if the market turns against the trader.    
               
The above trades pertain only to long trades.  In short trades, an individual is rooting for the price of stock to go down.  This is because the trader borrows stock from a company and then immediately sells them at market price.  If stock prices drop, the trader can then buy the shares back for a cheaper price before selling them back to the company.  For example, if a share of stock were borrowed at $100, and then drops to $80, the trader would then take a $20 profit when the stocks are resold to the company.  There are also limit and stop orders that pertain to short trades.  These are called sell-limit orders and buy-stop orders.
               
The major drawback to shorting stock is that there is unlimited potential for loss.  When a stock declines in price, it can only go so far.  Even a $500 share like Google can only drop down to zero.  When a stock goes up, however, there is no limit as to how far it can climb.  Because of this danger, shorts should be left only to the experienced trader.

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