How to Buy Stocks: Limit Orders, Stop Loss Orders, and More (FINRA)

Understanding Order Types Can Save Time and Money

When you place an order to buy or sell securities, you may get more—or less—than you bargained for. In some cases, the price quoted to you at the time of the sale may not exactly match the price you pay for your securities. This can happen because quotes may be delayed, trades take time to execute and, in highly volatile markets, millions of shares can trade in microseconds causing price swings.

You do, however, have the power to exercise some control over these factors by choosing the type of order you place. FINRA is issuing this alert to inform you about order types commonly available when you buy or sell securities. Understanding the benefits and risks of various types of orders can help you avoid unintended losses and better ensure your trades are executed in a timely manner and at a price with which you are comfortable.

Common Order Types

Orders fall into three primary categories:

• Market Order – An order for immediate execution to buy or sell at the best price obtainable in the market during normal trading hours, 9:30 am to 4:00 pm. With this type of order, you get the most certainty that your order will be executed, but you do not get a guarantee on the execution price. A market order generally will execute at or near the current bid or ask prices in the marketplace.
  
  What to Know: This is the most common type of investor order. Unless you specify otherwise, brokers typically will enter your order as a market order. Market orders are generally executed immediately because they do not have any restrictions tied to them. On the downside, you may not get the price you were originally quoted, especially in fast-moving markets. Also, if you place your order before or after normal trading hours, consider the possibility that news events or other factors may significantly impact the price of the security when the market opens again.
   
• Limit Order – An order to buy or sell a security at or better than a specified price (a "limit price"). A buy limit order can be executed only at or below the limit price; a sell limit order can be executed only at or above the limit price. This means you are guaranteed to get your limit price or a better price if your order is executed. However, there is a chance your order may not be executed at all. For example, if the market price fails to match or better your limit price while your order remains active, it will not be executed. Some limit orders include a time limit within which the trade must be placed at (or better than) the specified price. These orders generally may have higher execution costs than market orders.
  
  What to Know: This type of order is for investors who know the price they want for a particular securities transaction and want to manage market risk. Limit orders provide a guarantee that buy orders are not executed above a maximum price and sell orders are not executed below a set minimum. Limit orders are often used when obtaining the right price is more important than quick execution. The major risk with limit orders is that there is no guarantee that the order will be executed. The security may simply not reach your limit price within the specified time limit, in which case the order will expire. Or, in a fast-moving market, prices might move right past your limit price before the order can take place. For example, if a stock is trading at $120, and you place a sell limit order at $100, a flurry of market activity in the stock could cause it to rapidly move below $100 without the order being executed. Thus, your order may never be filled.
   
• Stop Order – An order to buy or sell a security once the price of the security reaches a specified price, known as the "stop price." When this stop price is reached, the order automatically turns into a market order and is executed as soon as possible at the current market price.
  
  What to Know: Similar to limit orders, brokers often recommend—and investors use—stop orders as a tool for managing market risk. You can generally use sell-stop orders to limit a loss or protect a profit position in the event the stock’s price changes. If you have a short position, you can generally use stop-buy orders to limit losses in the event the stock’s price increases. Some investors like stop orders because they do not have to continually monitor price movements to sell (or buy) at a specific price target.
  
  Because stop orders, once triggered, become market orders, you immediately face the same risks inherent with a market order, among other potential risks. In particular, during volatile market conditions, these orders may be executed at prices significantly above or below the "stop price" you set. Like other market orders, your order is guaranteed to be executed fully and promptly at the current market price, but you may not like the price you get in a fast-moving market. For example, if the current price of a stock is $80 and you want to protect against a significant decline, you could enter a sell-stop order at $75. If an execution in the market occurs at $75 or lower, your stop order is triggered and a market order is entered to sell at the next available market price. In a market where prices are falling quickly, you run the risk that the next available market price could be significantly lower than $75.
  
  Stop orders may be triggered on a short-lived, dramatic price change. During periods of volatile market conditions, the price of a stock can move significantly in a short period of time and trigger execution of a stop order, but the stock may later resume trading at its prior price level. If your stop order is triggered under these circumstances, you may end up selling at an undesirable price even though the price of the stock may stabilize during the same trading day.
  
  And stop order risks don’t stop with you. Sell-stop orders may exacerbate price declines during times of extreme market volatility. The activation of large numbers of sell-stop orders may add downward price pressure on a security, which, during a precipitous price decline, might cause your sell-stop order to be executed well below the stop price.
  
  To help manage the risks with stop orders, consider placing a "limit price" on a stop order (see chart below). A stop order with a limit price (a "stop-limit" order) becomes a limit order when the stock reaches the stop price, instead of a market order. By using a stop-limit order instead of a regular stop order, you regain a guarantee on the price you will receive; however, you lose certainty that the order will be executed because it will be treated as a limit order. Brokers cannot sell for a price that is lower (or buy for a price that is higher) than the limit price selected.

Orders with Time Restrictions and Other Conditions

Market, limit and stop orders can include time restrictions and other conditions. The order types available to you will depend on the market where your security is traded and what is allowed by your financial firm. For example, your firm may not allow stop or limit orders on some securities, or could charge higher commissions and other fees for processing them. Before building a buy or sell strategy on certain types of orders, ask your broker what types of orders you can place and what they cost. The tables below outline some of the other order types commonly available to investors.

Order Type	Description
Stop-Limit	A combination of a stop and limit order: an order to buy or sell at or better than a specified limit price only after the stop price has been reached. You run the risk that your order may not be executed because it will be treated as a limit order once stop price is reached.
Trailing Stop-Limit	An order in which the stop price trails the current price by either a number of points or a percentage the investor specifies. For example, you could put a trailing stop-limit order to sell your shares if they drop 10 percent from their current price. The benefit is that you would not need to keep resetting the order if the value of the shares rises or falls over time.
Fill-or-Kill	An order that must be immediately executed in full or it will be automatically cancelled.
Immediate or Cancel	A market or limit order that trades immediately and automatically cancels any unfilled portion.
All or None (AON)	A buy or sell limit order in which the broker is directed to fill the entire amount of the order or none of it. Immediate execution is not required, which makes this different than a fill-or-kill order.

Time Restrictions
Day	A market or limit order that expires at the end of the trading day it was placed if it is not executed.
Good Till Canceled (GTC)	A limit order that remains in effect until it is executed by the broker or canceled by the customer.
On Open	A market or limit order that must be executed when the market opens or re-opens. Any balance not executed as part of the opening trade is canceled.
On Close	A market or limit order that is either entered in its entirety at the closing price or canceled.

Things to Consider

Keep in mind that all orders are not handled the same way by your financial firm. Ask about your firm’s procedures for handling the execution of securities transactions and different order types, particularly during volatile market conditions. Market orders typically receive the highest priority, followed by limit orders.

When you use order types with automatic triggers, consider that these transactions may have unintended tax consequences. For example, you could end up paying a higher tax rate on your capital gains. The federal taxes you pay on long-term capital gains—those realized from assets held for more than one year—are generally lower than your individual tax rate. However, if a stop order triggers a sale on an investment you’ve held for less than a year, the capital gains would be taxed at your nominal federal income tax rate—which could be as high as 39 percent—plus a Net Investment Income Tax of 3.8 percent if your income exceeds thresholds set by the IRS.

No matter what type of order you choose, you cannot completely eliminate market and investment risks. You cannot predict when periods of market volatility will hit, so it is often best to decide what is most important to you based on your investment goals and objectives, whether it be price or making a trade at a specified time. In general, understanding order types can help you prioritize your needs, manage risk, speed execution and provide price improvement. For all of your securities transactions, check the trade confirmation you receive from your firm to make sure the price, fees and order information is accurate.

Resources

• FINRA Investor Alert: It Pays to Understand Your Brokerage Account Statements and Trade Confirmations
• FINRA: Evaluating Investment Performance
• Securities and Exchange Commission: Trade Execution: What Every Investor Should Know

Last Updated: 

 

August 9, 2016

Avoid Medicare Mistakes (thinkadvisor)

jULY 18, 2016

11 Medicare Mistakes to Avoid

The rules of Medicare are complicated and laden with deadlines that are costly to miss

Understanding the alphabet soup of Medicare is hard enough without getting lost in the details. But understanding the options – and what mistakes not to make – can help your clients age gracefully and is an essential part of any retiree's financial plan 

First, let’s generally define the Parts of Medicare. Part A, referred to as original Medicare, focuses on hospital coverage. Part B is medical coverage. Part C (also called Medicare Advantage) is a different way of putting Parts A and B into one plan, offered by private companies. Part D is prescription drug coverage.

The rules of Medicare are complicated and laden with deadlines that are costly to miss. Via Kiplinger, here are 11 common Medicare mistakes to avoid:

1. Not reviewing your Part D Plan annually

 Medicare Part D is a headache for many to keep on top of. But remember these key points:

• Open enrollment runs from Oct. 15 to Dec. 7 every year.
• During open enrollment it’s essential to review options because there might be changes to your current plan, meaning your cost and coverage would vary. Be leery of plans that increase premiums, increase your percentage of cost for drugs, or other requirements, like having to use a specific pharmacy, to be covered.
• Make sure you check if any drugs you’re on have gone generic, as you might get a nice price reduction.
• Medicare also helps you to compare plans. Check out the various links on Medicare.govor AARP.org for more information, guidance and price comparison tools.

2. Picking the same Part D plan as your spouse

Not all Part D plans are alike, and just because a plan works for you it might not be the same for your spouse, who may be taking different prescriptions. Use the Medicare Plan Finder to determine your out-of-pocket costs on each plan. Also keep in mind that some plans require the use of specific pharmacies.

3. Going out of network on private Medicare Advantage plans

If using private Medicare Advantage plans, similar to PPOs or HMOs, you’ll need to utilize the network of doctors and hospitals within the plan to get the lowest co-payments. Be wary that if you go out of network, there may be no coverage at all.

4. Not knowing how to switch Medicare Advantage plans anytime if needed

Even outside the annual open enrollment period, it's possible to switch plans for life-changing events, like moving to a place that isn’t in your current plan’s geographical coverage. And if you’re in the five-star plan, you can make a switch any time during the year. Also, from Jan. 1 to Feb. 15, you may be able to switch from Medicare Advantage to traditional Medicare plus Part D prescription-drug plan. 

5. Not considering Medigap within 6 months

Once enrolling in Medicare Part B, you have six months to buy any Medicare supplement plan in your area even if you have pre-existing conditions (and at age 65, who doesn’t?). But after six months, insurers can reject you or charge more depending on your health. It depends on your state rules and insurer’s policies. Check at Medicare.gov for your options. 

6. Not opting for Medicare when you turn 65 (most of the time)

Forever young, so who needs Medicare? Well, you’re smart to take advantage of what the government is giving you, often for free. If you are getting Social Security already when you turn 65, you’ll automatically be enrolled in Medicare Part A and Part B. But if you aren’treceiving Social Security benefits, you’ll have to act on your own to sign up. There are reasons to delay: for example, you or your spouse have a full-time job and already get health care coverage as a part of that.  Be aware that if you aren’t collecting Social Security benefits, there’s a seven-month period to sign up for Medicare, which runs from three months before the month you turn 65 to three months after. 

7. Not signing up for Part B if you have retiree or COBRA coverage

Again, there are many tricky steps in the Medicare signup game. Unless you or your spouse are receiving insurance through a current employer (who has 20 or more employees),Medicare is considered your main health insurance coverage. Retiree coverage, COBRA or severance benefits are NOT primary, and if you don’t sign up for Medicare, you might have gaps in coverage and be late on your Part B premium. So pay attention.

8. Missing the Part B enrollment deadline after leaving your job

It’s an alphabet jungle out there, but this one is easy: if you still have insurance through a job when you turn 65, that’s fine. You don’t need to worry about Part B premiums. But within eight months of leaving your job, you need to sign up or you might have to wait for the next enrollment period, meaning a gap in coverage. Then there is also the possibility of a 10% lifetime late-enrollment penalty. 

9. Ignoring income thresholds

Most people pay the minimum of $140.90 a month for Part B premiums and $12.30 per month for Part D. This goes higher depending on your adjusted gross income. So if you are bringing in more than $85,000, that Part B premium could more than double per month, where as Part D could jump fivefold. Be mindful when you are withdrawing from tax-deferred accounts that you don’t go over the income threshold if possible.

10. Not fighting surcharge changes for the year you retire

The Social Security Administration uses your tax returns from the most recent two years to determine if you are subject to an income surcharge, that is you are making more than $85,000 a year. But you can protest it if you prove life-changing events, such as divorce, death of a spouse or retirement. 

11. Not minding your HSA contributions

You can’t contribute to HSAs if you are getting Medicare, but if you or your spouse have health insurance through a job (with 20 or more employees) and haven’t applied for Medicare or Social Security benefits, you still can continue to add to your HSA. That said, be careful about contributions in the year you leave your job and sign up for Medicare, as your HSA must be prorated by number of months on Medicare.