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In the previous module, we explored the fundamentals of stocks and the factors that drive their prices in the market. If you have any questions or need clarification on a concept, please don't hesitate to contact us – we're here to help!

Now that you've grasped the basics of the stock market, you're well on your way to buying and selling stocks through a brokerage account like Fidelity or Robinhood. However, before diving in, it's crucial to understand order types – the next critical step after finding a stock quote.

In the previous game, we didn't offer order type options because the focus was on demonstrating general market behavior for stocks and indexes.

By the end of this module, you'll be familiar with the three main order types used in the stock market. You'll also get to put your knowledge to the test by playing a game where you can choose the appropriate order type for your investment strategy.

Order types are specific instructions you give your broker on how you want to buy or sell a security (stock, bond, ETF, etc.) in the stock market. They tell the broker the following:

Whether you want to buy or sell: This seems obvious, but it's the foundation!

The price you're willing to pay or receive:  Some order types let you specify a price, while others are more flexible.

The urgency of the order:  Do you want the order filled immediately, or are you willing to wait for a better price?

Here are 3 common order types:

Market Orders

Market orders are among the most straightforward order types in trading. When you place a market order, you're essentially telling your broker to execute the trade immediately at the current market price. These orders prioritize speed of execution over price.

Suppose you're watching the stock of Company X, which is currently trading at $50 per share. You decide to buy 100 shares of Company X and place a market order. Your broker executes the trade at the best available price, which might be slightly above or below $50 per share, depending on the liquidity and volatility of the stock.

Question: What is the main advantage of using a market order? And what is the main disadvantage?

Limit Orders

Limit orders provide traders with more control over the price at which their trades are executed. With a limit order, you specify the maximum price you're willing to pay for a buy order or the minimum price you're willing to accept for a sell order. However, there's no guarantee of execution if the market doesn't reach your specified price.

Let's say you're interested in purchasing shares of Company Y, but you're only willing to buy if the price drops to $45 per share. In this case, you would place a buy limit order with a limit price of $45. If the stock price reaches $45 or lower, your order will be triggered, and you'll buy the shares at $45 or better.

Question: What is the key advantage of using a limit order compared to a market order? And what is the key disadvantage?

Stop Orders

Stop orders, also known as stop-loss orders, are used to limit potential losses or protect profits. These orders become market orders once the stock reaches a specified price, known as the stop price. Stop orders can help traders manage risk by automatically triggering a sale when the market moves against them.

Suppose you own shares of Company Z, which are currently trading at $100 per share. You're concerned about potential losses if the stock price drops, so you decide to place a stop-loss order with a stop price of $90. If the stock price falls to $90 or below, your stop order will be triggered, and your shares will be sold to limit further losses.

Question: How do stop orders help traders manage risk in their trading positions? And what is one potential drawback of using stop orders?

Trailing Stop Orders

Trailing stop orders are a dynamic variation of regular stop orders. Instead of setting a fixed stop price, trailing stop orders use a trailing amount that adjusts based on the stock's price movement. These orders are designed to protect profits by allowing gains to accumulate while limiting potential losses.

Let's say you purchase shares of Company W at $50 per share, and the stock price starts to climb. You want to protect your profits but also allow room for further upside potential. You place a trailing stop order with a trail amount of $5. If the stock price rises to $60 per share, your trailing stop order will set a stop price of $55. If the stock then drops to $55 or below, your shares will be sold to lock in profits.

Let's put our understanding of order types to the test! In this game, we'll present you with 2 scenarios. For each scenario, read the stock quote carefully and then place an order (just one share for now) based on the situation. We'll continue using this platform for other exercises to solidify your learning.

Open Simulator, click "TRADE" and try out the scenarios below.

Practice Scenario 1: Market Order

Target Stock:  Apple

Your Goal:  You're confident Apple's price will continue to rise and want to jump in quickly.

Instructions:

In your simulator, search for Apple stock.

Choose the "Market Order" option.

Verify the quantity of shares you want to buy with your available cash.

Execute the order!  Observe what happens. Did you get the shares immediately?  At what price per share?

Practice Scenario 2: Limit Order

Target Stock:  Google - Trading at $ per share, but you think it might dip slightly before going up again.

Instructions:

Find Google stock in your simulator.

Choose the "Limit Order" option.

Set a limit price that's slightly below the current market price (e.g., $24 or less).

Enter the quantity of shares you want to buy if the price reaches your limit.

Execute the order!  Observe what happens.  Did your order go through immediately? If not, why do you think that is?

Questions

The Tech Boom

You're playing a stock market simulator and the tech sector is booming! ABC Tech, a company you've been following closely, is experiencing rapid stock price growth. You're excited to jump in and buy shares, but you're also cautious about potential volatility.

Question:  What order type would be most suitable for this scenario?

• A) Market Order: Get in on the action quickly, even if it means paying a slightly higher price than the current market price.

• B) Limit Order: Set a specific price limit to ensure you buy shares at a price you're comfortable with, but risk missing out if the price keeps rising.

• C) Stop-Loss Order:  Not applicable in this scenario (Stop-loss orders are used to limit potential losses, not target gains).

The Blue-Chip Bargain

DEF Company, a well-established and reliable blue-chip stock, has seen a recent price dip due to temporary market jitters. You believe this is a good long-term investment opportunity and want to buy shares at a discount.

Question:  What order type would be most suitable for this scenario?

• A) Market Order: Not ideal, as you might end up paying more than the current dip price due to market fluctuations.

• B) Limit Order:  This is a good choice. Set a limit price slightly below the current market price to secure shares at your desired discounted value.

• C) Stop-Loss Order:  Not necessary at this point, but you can consider placing one later to protect your gains if the stock price starts rising again.

The Erratic Stock

GHI Company is a smaller, high-growth stock known for its price volatility. You're interested in potentially profiting from these swings, but you also want to manage potential losses.

Question:  What combination of order types could be a good strategy for this scenario?

• A) Market Order:  Too risky for this volatile stock, you could end up buying at a peak.

• B) Limit Order:  Consider a limit order to buy at a specific price

• C) Stop-Loss Order:  Placed above your buy price (stop-loss) to limit potential losses if the stock price takes a sudden downturn.