Once all the "homework" has been done in the run-up to an investment transaction (evaluating the risk profile, fixing the investment strategy, analysing the market and the company, identifying "pitfalls", etc.), things seem simple: "Pick up the phone and call the bank, or in the case of online entry, boot up the PC, activate the online platform... and BUY (or SELL)."
But "beware", there are also mistakes to avoid when placing an order, because the type of stock market order can be crucial. After all, if you use order execution in a targeted and correct manner, this can optimize buying or selling as well as increase overall performance. We will be happy to explain the different types of order to you in more detail below. It should be noted at this point that not all banks or online platforms offer every specific order type.
1. essential components of each order
In addition to the specific type of order (points 2 & ff.), clear key data must be "delivered" with a securities order:
- This begins with the unambiguous indication of whether it is to be bought or sold; since the terms can quickly be confused acoustically when placing an order by telephone, the terms "acheter" and "vendre" are used in practice.
- Each security has its own number. In national use, we use the familiar securities number, in the international standard we speak of the ISIN number (International Securities Identification Number).
- Not to be underestimated is the banal indication of the purchase quantity (number of shares, nominal value of bonds, etc.). Particularly in the case of online entries, always check the quantity again in order to avoid unpleasant surprises with regard to the amount invested.
- Each order must also include a validity period. Depending on the liquidity of the security and the price limit selected, the duration must be specified as "valid on the stock exchange" (today) or until the end of the week, end of the month, etc. or until revocation.
- A security may be listed on different stock exchanges and in this case may also be traded on different stock exchanges. As a rule, the stock exchange on which the security has the best liquidity should be favoured. If an investor has various foreign currency holdings, another trading venue may also be suitable.
- Other specific order supplements may arise in individual cases; the bank or online platform should point this out to you.
2. the "best" order
Let me say this at the outset: The designation "best" is not automatically also the "best" price!
This order type, although common and the simplest, should definitely only be used if the security in question has high market liquidity or a high daily/trading volume! In this case, it may be assumed that the desired transaction will be executed "at the market". Since the spread between bid and ask prices is generally small, there is no risk in this case of receiving executions with large, excessive deviations.
In the case of securities with low trading volumes, on the other hand, there is a latent risk in the case of a "best order " that you will be "taken to the cleaners" by the market and will not achieve the desired cost price or sales proceeds. In this case, limits must always be applied (point 3).
Another reason for placing a "best order" could be if a transaction has to be carried out as quickly as possible (raising capital, offering Lombard credit, covering debit balance, etc.).
3. limited order
In order to exclude any negative surprises in the case of "best" orders, it is advisable, irrespective of individual securities parameters, to enter a stock exchange order with a price limit! Depending on how close the limit is to the current market price, the validity period of the order can or should be fixed correspondingly shorter or longer.
In the case of a limit buy order, the trade is concluded when the market price is <= limit.
In the case of a limit sell order, the trade is concluded when the market price is >= limit.
The advantages of limited market orders clearly outweigh the disadvantages. Nevertheless, one scenario is a disadvantage and often leads to short-term anger at oneself. This is when a limit is set too tightly and execution fails by a few francs or even centimes... and the desired limit is no longer reached in the long term.
It therefore makes situational sense (especially in the case of major market fluctuations) to monitor limits closely, and it is also possible to adjust a limit at any time.
4. stop-loss order
Stop-loss orders are only used for sell orders! This type of order can be used to limit any losses. Execution only occurs in the event of a downward price trend. And a stop-loss order is usually placed with a stop of around 10% below the current share price.
Example: An investor is away on holiday and does not feel like looking after one share or another during this time. However, in order to avoid unpleasant loss surprises, the investor sets a stop-loss price limit of CHF 11.50 on his UBS holdings (the current price before his departure is CHF 12.65). If the share price collapses, the stop-loss order is executed when the level of CHF 11.50 is reached; the investor thus limits his loss to the said CHF 11.50.
However, this only works for securities which generally have a high trading liquidity!
Caution is advised with stop-loss orders for rather illiquid securities! Why? When the sell order is triggered, the shares are sold at the next possible price or at the next price that comes into effect. In the case of thinly traded stocks, the sale can therefore take place immediately and also massively below the defined limit, because the order is then automatically implemented according to the "best method". In the case of less liquid securities, the "normal" stop-loss order therefore does not fulfil its actual purpose. In this case, point 5 applies.
5. stop-loss limit order
The stop-limit order differs significantly from point 4. Here, downward protection is built in, i.e. the sale is only executed up to a fixed lower limit, but under no circumstances lower. In the event of a crash or other price distortions, no sale can therefore be executed at any sell-off price in accordance with the lower limit.
6. Stop Buy Order
This order intention is quickly explained. This is an order with a predefined buy price. If the fixed price is reached, a buy order is triggered and the execution takes place at the next possible price (could also be below the predefined price due to the automatically applied "best method").
In our view, this type of order makes little sense. It is primarily used by "believing" chart technicians.
7. Stop buy limit order
In contrast to point 6, the investor sets two limits here... one that activates the buy order (e.g. CHF 100 / stop buy) and another that then triggers the buy order (e.g. CHF 95 / stop limit). Execution only takes place if both parameters are touched.
With the best will in the world, we cannot see any advantage in this type of order either!
In addition to the order types listed on pages 1 and 2 (1 to 7), there are also the following, more complex possibilities (8 to 13). However, we would like to point out that these are mainly used - if at all - by professional stock exchange participants or computer-aided trading programs. For the sake of completeness, we have also listed these very specific order types. To illustrate the complexity, we have briefly described the example of the trailing stop-loss order (point 8). For the other order types, we have deliberately omitted the detailed explanations, which tend to be difficult to understand. However, if such types of orders do arouse your interest, please contact the trading department of your house bank directly. They will clarify for you whether "such action" is even on offer and whether this could even make sense depending on the portfolio.
8. Trailing stoploss
The trailing stop loss order is basically a sell order. On the one hand, this is about limiting losses, and on the other hand, you can let profits run automatically if the hedging level remains constant.
The trailing stop loss is in principle another type of stop order in which the stop price is linked to the effective price at a fixed subsequent distance, the so-called trailing value. If the value rises and the deviation is therefore greater than the trailing value, the stop price is adjusted upwards. If the comparative value declines, the stop price remains unchanged. If the price now reaches or falls below the specified stop price, a sell order (at the market) is transmitted directly and executed at the subsequent tradable price (bid price). No further comment on this type of order, which is difficult to understand.
9. Trailing stop-loss limit
A trailing stop-loss limit order is intended to allow the investor to define a limit for the maximum possible loss without limiting the maximum possible profit.
A Market-to-Limit (MTL) order is submitted for execution at the current best market price. If there is a partial execution of the order, the remaining quantity (number of units) is cancelled and placed again as a limit order. The limit used is the price at which the first transaction of the order was executed.
A one-cancels-others order (OCO) corresponds to a pair of orders that experienced traders can use on an automated trading platform. When one order is executed, the other order is automatically cancelled. This type of order forms an essential part of risk management.
This very new order type allows a market or limit order to be linked to selected market events. The order is triggered automatically when the predefined events occur. For the time being, the most important benchmark indices or their changes are stored as "events" - also only computer-based.
13. Iceberg order
An "iceberg" order is a limited buy or sell order on a computer exchange. It is important to note that the actual trading volume underlying the order is not visible in the open order book, but only a fraction of it. In this way, financially strong market participants want to prevent the mere visibility of the size of the total order from moving the price. Market participants only ever see the respective "tip of the iceberg" of an "iceberg" order.
We are pleased to be able to introduce you to a few "crazy" order types in addition to the more common ones. The benefit in practice lies primarily in the order types 2 to 7, the rest serves in our opinion at most the expansion of the knowledge horizon.
Good luck with your order placement.