Market orders, limit orders, stop-losses, margin and short selling, explained

Order types

• Market order: executes immediately at the best available price. Fast, but the price you get can differ from what you saw, especially in thin or volatile stocks.
• Limit order: executes only at your price or better. You control the price but it may never fill.
• Stop (stop-loss) order: becomes a market order once the price reaches a trigger level. It is meant to limit a loss, but in a gap or fast fall the fill can be well below the trigger. A stop-limit order sets a floor but may not fill at all.

Bid, ask, spread, liquidity and volume

You buy at the ask and sell at the bid, so the spread is a built-in cost. Liquid securities (heavily traded, with tight spreads) are cheap to trade; illiquid ones are not. High volume usually goes with better liquidity.

Margin

Margin means borrowing from your broker to invest more than you have. Gains and losses are both magnified, and if your account falls too far you can face a margin call that forces you to add cash or sell at the worst moment. You can lose more than your original deposit. Most long-term investors never need it.

Short selling

Short selling is borrowing shares, selling them, and hoping to buy them back cheaper. Potential gain is capped, because a price cannot fall below zero, but the potential loss is unlimited, because a price can keep rising. It also carries borrowing costs and can be forced to close at a bad time.

Investing vs trading, and day trading

Investing holds for the long term and relies on business growth and compounding. Trading is short-term and relies on price movement and timing. Day trading means opening and closing positions within a day. Studies of retail traders have repeatedly found that most lose money after costs. US rules also set minimum account sizes for frequent day traders. Treat trading as a different activity from saving for the future.

Paper trading

Simulators let you place pretend trades with virtual money. They are useful for learning the mechanics and testing a plan, though real money brings emotions a simulator cannot reproduce.

Knowing when to buy or sell

There is no signal that is right every time. Many investors replace guesses with rules: contribute on a schedule, review on a schedule, and sell only when the original reason for holding is gone, the position has grown too large, or the money is needed. Write the rules before emotions arrive.

“Buy low, sell high” is easy to say and hard to do. A plan gets you closer than a feeling.