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Author: TMFGump Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2209  
Subject: Re: limit order and stop order Date: 4/28/1999 8:12 PM
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Hey nillon,

A short order is an order to sell shares you don't have. The idea is that the stock price will decline and you can then buy back the shares at a lower price. Here is a link to more information on short selling: http://www.fool.com/FoolFAQ/FoolFAQ0033.htm

A limit order places a buy or sell transaction, so long as the stock price remains at a prespecified level (or better). You use this type of order to ensure that the market price doesn't move against you between the time you place an order and the time the order is executed.

Let me explain with an example. A market order means to buy the stock at the best price available when the order hits the exchange. If you ask a broker to buy shares of a stock "at the market" when the ask price is $10, you might actually get the stock for $9 3/4 or $10 1/4, becuase of price changes during the few seconds between when the order is placed and filled. While normally these changes are small, they can be greater in "fast moving" markets. If the company had just announced a new web site, for example, the price could potentially jump up to $12 a share -- and you'ld be stuck buying at that price.

Alternatively, you could issue a limit order to buy the stock for $10 per share. This would mean that you will buy the stock as long as the asking price is $10 or less. If the stock is available for $9 3/4, you will be filled at $9 3/4. If the stock is $10 1/8 when the order hits the floor, you will not get your stock. Instead, your order will sit dormant until the ask price drops to $10 or less. While you are ensured of not paying more than the prespecified price (or selling for less than the limit price), you also run the risk of not having your order filled.

If the stock doesn't appear to have a lot of volatility and their is no earthshattering news, you are usually okay placing a market order. The price will probably only change by an eighth or sixteenth. If the stock moves around a lot, however, you will be better served placing a limit order to make sure you don't get hit by adverse price movements.

Fool on,

Warren

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