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By Matt Lewis - June 8, 2018
Many recent headlines lament the lack of control individuals have over their personal information—data generated on social media and mobile apps. There's legislation around it, hashtag movements and congressional hearings, but in general, many people feel that we don't have enough control over our own digital footprints.
But what about investing? How many investors think about control when trading exchange-traded funds (ETFs) or stocks? A market order may be the most common default order type for trading platforms, but it's not the only option. Different order types provide increased control over trading, including the price received for a security. No matter whether you're an institutional investor, an advisor or a self-directed investor, consider the following to expand your knowledge on how to place orders for ETFs and stocks in the markets.
Two common types of trade orders are market orders and limit orders. Market orders are used for immediate sales made at current market prices. Limit orders specify the price a buyer is willing to pay or receive for an ETF or stock. Each has its pros and cons.
Market orders are helpful when speed, not price, is your priority. They make sense for highly liquid ETFs and stocks when a buyer is agreeable to an advertised offer. But market conditions can change quickly, especially given how much of today's trading is automated. In the rare case when asset prices may fall out of line, the price you see and the price you actually pay by the time the trade executes could be vastly different. In that situation, some investors need reassurance that the price they pay will match the price they've seen on the screen. I know I certainly would! That's where a limit order comes in.
A limit order lets investors specify the purchase price for a specific asset. Once in place, the order will only be executed if it can achieve that price or better (i.e., lower purchase price or higher sales price). Remember, a limit order puts price before execution certainty. So, you may have to wait longer for a trade to execute, particularly if quotes rapidly change throughout a normal trading day. In that case, some investors consider putting in a limit order at the current offer or a penny above if buying, or at or a penny below the bid if selling, to increase the chances of their order being completed. If there is room for price improvement, the market will execute their trade at that improved price.
Different situations may call for different trade types. Market orders are good when I need a speedy trade completed, no matter the price. When I want to be sure the market quote is what I am going to get, with no surprises, then I use a limit order even if the ETF or stock is liquid. Yes, setting a limit order may take a few seconds more than just putting in a market order, but at least to me, it's worth it because I'll have more confidence in the price I'm going to get.
Investing involves a certain amount of risk, and some people are more comfortable with uncertainty than others. Having a better understanding of the different types of trade orders available is just one simple step you can take to better tailor that investing risk to your preference.
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How many investors think about control when trading stocks or exchange-traded funds (ETFs)? Different order types provide increased control over trading, including the price received for a security. Consider the following to expand your knowledge on how to place orders for ETFs and stocks in the markets.
June 08, 2018
ETF shares may be bought or sold throughout the day at their market price, not their Net Asset Value (NAV), on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market.
ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF's net asset value. Brokerage commissions and ETF expenses will reduce returns.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.