My work puts me in touch with all kinds of investors, from beginners to seasoned pros.
And it's made me realize that many investors, particularly those who are new to the stock market, are totally unaware that there are different order types, let alone the advantages that come from using them. So they simply call up their broker and tell him that they want to buy a given stock, bond, or ETF.
There's a problem with that. Unless you name a specific price, you're effectively giving your broker permission to fill your order at any price. Of course, you're guaranteed to get filled as long as there's trading activity – meaning buyers and sellers making a market.
It's the price that's the problem. But there's a way around that.
Now, the tactic I'm about to show you is perhaps the most important of all. It's easy to use, and it takes only an extra second or two to put in place.
Even better, it doesn't cost a penny, it can save you money, and it dramatically increases your odds of success.
And best of all, it puts you in control.
You Wouldn't Put Up with This at the Store — Don't Stand for It in Your Trading
Before I tell you what this tactic is, though, I want to tell you why it works. Consider this…
Would you go to your favorite store and tell the salesperson that you'll take those jeans at any price or head for the gas station to fill up for whatever the pump jockey wants to charge you?
No way – you don't want to get ripped off.
But that's exactly the risk you're taking in the stock market if you don't tell your broker what you're willing to spend. For example, "I want to buy XYZ but pay no more than $50 a share."
Doing so takes away the advantage afforded to the much bigger traders who hold most investors at the mercy of the markets.
It also removes the threat of being played by hedge funds, unscrupulous market makers, and institutional traders who would force you to buy your shares more expensively than you would otherwise.
Let me give you an example.
Carte Blanche for Your Broker Could Cost You More Than $3,000 in a Single Trade
As I write this, Netflix Inc. (Nasdaq: NFLX) is trading at $116.18 per share. The best bid – meaning what somebody will buy it for – is $116.17. The best ask – meaning what somebody will sell it for – is $116.20.
But there are also orders out there for as little as $100 and as much as $130 a share.
If you want to buy 100 shares of Netflix and you don't specify a price, your broker could execute your trade anywhere in that range. So you could potentially spend as little as $10,000 or as much as $13,000.
However, your order could also be dramatically outside that range.
Let's say there's a technical glitch – which we've seen happen several times in the recent past – and the best ask on the book is $200 a share. If you put in an order to buy at market, your trade will execute at $200 and you will have spent $20,000, which is probably not at all what you intended.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.