Investor Warren Buffett is credited with saying that the first rule of investing is “never lose money” and the second rule of investing is “never forget rule number one”. While there are many factors which determine whether you gain or lose money on securities trading, a good first step in preventing loss is to place the right orders with your securities broker.
Here, moneyland.ch explains order types offered by Swiss online trading platforms and how they can help you:
1. Market order
A market order is the most basic type of order. Securities are bought or sold at the best available price at the time that the order is placed. All Swiss online brokers accept market orders.
Example: You place a market order for a stock with a going price of 20 Swiss francs. The broker buys that stock at the best available offer, which will ideally be 20 francs. However, the best available offer for the stock may be more or less than the going rate would lead you to believe.
2. Limit order
A limit order helps you avoid paying more for securities than necessary. When you place a limit order to buy a security, you specify the maximum price which you are willing to pay for a security. The broker only purchases the securities if they can be bought at the specified price or lower.
Example: You place a limit order for a stock with a limit of 10 Swiss francs. The best available offer for that stock is 13 francs, so the broker does not buy it immediately. If the price of that stock fell to your price limit of 10 francs or lower, the broker would buy it at that price.
When you place a sell order, a limit order can be used to specify the minimum price which you want to sell a security for. The broker will not sell the security unless they can get the price you specify (or more).
3. Stop order
A stop loss order helps to protect your investment capital. When you place a stop order for a security, you specify a price (typically lower than the price you pay for securities). If the rate of the security falls to or below the price you specified, the broker sells it to the highest bidder as soon as possible.
Example: You buy a stock for 20 francs using a stop order with an 18-franc stop limit. If the value of the stock fell to 18 francs or less, the broker would sell the stock for the best price available. Ideally the stock would be sold at 18 francs and you would only lose 2 francs on that stock.
The downside of stop orders is that if the price of a stock rises significantly and then falls, you may lose all of your profit.
Example: You buy a stock for 20 francs using a stop order with an 18-franc stop limit. The price of the stock climbs to 26 francs and then falls steadily. The broker only sells the stock when it reaches the 18-franc stop limit, so you lose 6 francs of profit in addition to the 2 francs of investment capital. Using a trailing stop order (see below) can help prevent this problem.
Stop orders can also be used as stop buy orders. When you place a stop buy order the broker will buy a security if its price reaches or surpasses the stop price you specify.
Most Swiss securities brokers including Saxo Bank, CornèrTrader, Strateo, Swissquote, PostFinance E-Trading, VZ Online Trading, AKB 5Trade, TradeDirect, Cash and Migros Bank provide the option of stop orders.
4. Trailing-stop order
When you place a trailing stop order, you specify a percentage or price range below the going rate rather than a fixed stop price. If the rate falls by that amount, the securities are sold at the best available price to prevent further losses. Trailing stop orders are beneficial because no matter how high the rate of a security climbs, the trailing stop limit follows it automatically – protecting not just your investment capital but also your profit.
Example: The going price of a stock is 15 Swiss francs and you place a trailing stop order for that stock with a trailing stop of 2 francs below the going rate. The stock’s price climbs to 25 Swiss francs and then falls. As soon as the rate falls by 2 francs (to 23 francs in this case), the broker sells it at the best available offer. In the best case the stock is sold at 23 francs and you still make a profit of 8 francs above the price you paid.
Trailing stop orders are not offered by all brokers, and are not accepted by all stock exchanges. Swiss online brokers which accept trailing stock orders include Strateo, Saxo Bank, CornèrTrader, Swissquote and PostFinance E-Trading.
5. Stop-limit order
A stop limit order combines a stop order and a limit order. The price limit you specify applies to both the stop order and the limit order. A stop limit order works just like a stop order until the price of the security falls to the stop price you specify. When it does, the order becomes a limit order. This means that the security will not be sold for less than the specified price limit.
Example: You buy a stock using a stop limit order with a stop price of 10 francs. If the price of the stock falls to 10 francs, the order becomes a limit order. The broker will not sell the stock for less than 10 francs, even if the highest available offer is just 8 or 9 francs. The stock will only be sold if the broker can get 10 francs for it. This differentiates a stop limit order from a stop order, with which the stock is sold at the best available offer when the stop loss limit is reached.
Stop limit orders are offered by some (but not all) Swiss online brokers, including Tradedirect, PostFinance E-Trading, Cash, Migros Bank, VZ Online Trading and AKB 5Trade.
6. Trailing-stop-limit order
A trailing stop limit order is a stop limit order which uses a limit given as a percentage or price range below the going rate, rather than a fixed stop price. If the price of a security bought using a trailing stop limit order falls by the specified percentage, the order becomes a limit order. The broker will not sell the security for less than the specified limit. In this way, a trailing stop limit order combines features of a trailing stop order and a stop limit order.
Example: You buy a stock for 20 francs using a trailing stop limit order with a 5% trailing stop loss limit. The price of the stock increases to 22 francs and then decreases to 20.90 francs – a 5% decline. Because the stop loss threshold has been touched, a limit order is put in place for 20.90 francs (going rate after a 5% decline). The security will only be sold if the broker can get at least 20.90 francs for it.
Using trailing stop limit orders can help prevent profit losses as well as investment capital losses. However, PostFinance E-Finance is one of the few Swiss online brokers which offer this order type.
7. One-cancels-other (OCO) order
A one-cancels-other (OCO) order lets you combine two different orders, such as a stop loss order and a limit order. When one order is fulfilled, the other is cancelled. There are many different combinations of OCO orders. The combinations which can be used depend on which other order types are offered by your broker.
Example: You place an OCO sell order for a security. The OCO order is made up of a trailing stop order with a 5-franc trailing stop loss limit and a limit order with a 50-franc limit. If the price of the security climbs to the 50-franc limit or higher, the broker sells the stock at the limit amount or higher and the trailing stop order is canceled. If the price of the security falls by 5 francs – the trailing stop loss limit – the broker sells the security at the best available price and the limit order is canceled.
8. If-done order
An if-done order lets you combine two orders, with one being contingent on the other. If and when the first order is fulfilled, the second order takes effect.
Example: You place an if-done order made up of a limit order with a 10-franc limit and a stop loss order with a 9-franc stop price. If the price of the specified security falls to 10 francs, the broker buys the security. If the price of the security continues to fall until it touches the 9-franc stop price, the broker sells the security to prevent your losing money.
If-done orders can be used for both buy orders and sell orders in many different combinations, depending on which order types are offered by your broker and accepted by the exchange being used. Swiss online brokers which let you use if-done orders include CornèrTrader and Swissquote.
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