Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 151

$49 per share. Most brokers give you the best price between your limit order and the market order at the time of order entry - yet another benefit of limit orders. There is no reason for the average investor to enter market orders just to gain marginal speed in order execution. Limit orders are the best way to protect yourself from erratic market moves and take control over your order execution prices. The worst that can happen with limit orders is that your order may not get executed, which means the stock price moved beyond the limit at which you were willing to buy or sell. There is always the next trading day.

Stop and stop limit orders are perhaps the most misunderstood types of orders by average investors. Also known as stop loss, these types of orders are really not that crucial for occasional investors but since they exist, you might as well get to know them. As indicated by the name, a stop loss order is used to curb losses incurred by adverse stock moves. For example, some people do not like to hold onto a stock if its price drops below a certain value. Others may only want to buy a stock when its price moves up to a certain value. Here is when a stop order comes in handy.

Let's use our example to illustrate the point. Suppose you own Ford stock with the current going price of $50 per share (your purchase price is irrelevant in this example). Now the stock begins to decline precipitously in value and you are getting nervous that it may go too low for your comfort.You would like to dump the stock if it reaches $45 to protect yourself from further erosion. Basically you want to wait in hopes that stock will bounce back from its decline, but if it hits $45 you would like to cut your losses and sell at that point. This is when you enter a stop order at $45 to sell your Ford shares. Now if the stock never reaches $45 per share and either stabilizes above $45 or starts to move back up, your order would never execute. However, if the stock price reaches or goes below $45, your stop order will turn into a market order and your shares are sold. Of course, the stock may go to $44 and then

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Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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