The advent of online trading has opened a new world for investors. Trading stocks and options online can provide you a lot of flexibility at a lower overall cost compared to a traditional stock broker.
In the past, the main way to research a stock was to try to squeeze the information out of your broker with a phone call. Now, the ability to search for the company fundamentals is readily available on your desktop or mobile device.
After you find a stock with all the characteristics of a company in which you’d like to invest, it’s time to place the trade. With online trading, you pay a lower commission fee in most cases, and have many strategies to choose from when entering the trade.
How to place an online stock trade
If you are going to learn how to trade stocks online with Ally Invest, you need to know the vernacular involved with the trading screens.
First, let’s talk about the three simplest–but most important–terms to understand before placing a trade online. You will see these words every time you get a quote on a stock (or an option for that matter): Last, Bid and Ask.
- Last is the price of the last trade that occurred on the stock.
- Ask is the lowest current market price offered by a potential seller.
- Bid is the highest current market price offered by a potential buyer
What is an online stock order?
An online stock order is a set of specific instructions to buy or sell a specific security. Orders are entered on the stock order ticket. This order ticket includes the action, share amount, symbol, price and duration.
This is what Ally Invest’s stock order entry screen looks like.
First, let’s discuss the action: Buy or sell.
Buy – Take cash from your account, purchase stock in the open market and place the stock in your account.
Sell – Sell stock held in your account on the open market and place the cash in your account.
Important Trading Terminology
Shares: Enter the amount of shares you wish to trade. This must be a whole number, as the market centers do not accept fractional share orders.
Symbol: Enter the trading symbol/ticker (usually letters) for a publicly traded security. Every security has a different sequence of characters.
Types of Orders
Market Order: This is a buy or sell order to be executed at the best price currently available in the open market. You are guaranteed an immediate execution, but not a specific price. When you enter a market order to buy, you need to pay attention to the ask price on your stock quote. If you are selling you need to pay attention to the bid price. Since a market order does not guarantee a price, beware that the price could move in either direction before your order gets to the trading floor.
Limit Order: For buyers, this is an order to buy stock at or below a specified price. For sellers it’s an order to sell at or above a specified price (called the limit price). Limit orders will be executed only at a specified price, or if the price moves favorably for the buyer or seller, it will automatically be executed at the most advantageous price available.
In other words, if the market is at a “better” price for you, then your limit order will be executed at that “better” price. An example of a situation when this might happen is if the stock gaps overnight and opens at a price more advantageous to you than the price specified in your limit order.
The tradeoff for the price protection of a limit order is the possibility that it will not be executed if the market does not reach your price.
Stop Order: this is a market order to buy or sell if a specified price (the stop price) is reached or passed. As soon as the stop price is reached the order will be executed “at market”. A sell stop price will be below the market; a buy stop price will be above the market. Sell stops are the most common use of this order type. The order will be entered after the stock has been purchased with the goal of selling the stock and avoiding losses if the market drops precipitously.
Stop Limit Order: this is an order to buy or sell a certain security at a specified price or better, but only after a specified price (stop price) has been reached. A stop-limit order is essentially a combination of a stop order and a limit order.
Day Order: a buy or sell order which automatically expires if it is not executed during that trading session. All market orders are automatically set to Day.
GTC (Good ‘Til Canceled): An order to buy or sell that remains open in your account for 60 calendar days from the original date placed, unless executed or canceled. Changes or edits to a GTC order will not affect the original order date.
How to place an option order
Options are contracts that give the owner the right to buy or sell an asset at a fixed price (called the strike price) for a specific period of time. The seller of the option contract has to take the opposite side of the trade if the option owner exercises the right to buy or sell the asset.
There are two types of options: calls and puts. If you buy a call, you have the right to call the underlying stock away at the strike price. If you buy a put, you have the right to put stock to someone at the strike price.
Entering an online option trade is very similar to entering an online stock trade, with a few key differences. It is just as easy to sell options–without owning them–as it is to buy them on the open market. Because of this when we enter on option order we need to add a few more words, and thus, there are a few more terms we need to define.
Key option terms
Below are several key terms relating to options trading.
- Buy to Open: Buy an option (put or call) and create a long position to your account.
- Sell to Close: Close out or neutralizes an existing long position that was created by buying to open.
- Sell to Open: Sell an option and create a short position; this is also known as writing an option contract.
- Buy to Close: Close out an existing short position that was created by initially selling to open.
- Contract: An option contract ordinarily represents 100 shares of the underlying stock, or has a multiplier of 100 for Index options. You’ll need to define the number of contracts whenever you trade options. In the off chance of a merger or acquisition, terms of the option may change.
- Symbol: Each individual option will have its own ticker symbol. You will need to find that specific symbol and enter it into the symbol field. Or, use Ally Invest’s option chains to select the option you want to buy or sell. Then the order screen will be pre-populated with the ticker symbol.
This is an option chain. This will enable you to see the ticker symbol at every strike price, and let you select specific options to pre-populate the order entry screen.
This is Ally Invest’s option order entry screen. Note the similarities and differences between this and the stock order screen.
From this point, you will follow the same steps as entering a stock order. Select the type Market, limit, stop, stop/limit. Then the duration: day or GTC (Good ‘Til Canceled) and any additional restrictions you would like to apply.
If you are looking for an online broker, be sure to check out Ally Invest. We offer a powerful online stock and option trading platform from which individual traders and organizations can easily gain access to all the major stock and option exchanges, with low transaction costs and fast accurate order executions.