by Kevin Tetter

Created on: August 30, 2010   Last Updated: August 31, 2010

Once you have done your research and decided what stock you would like to purchase, your next decision will be what type of trade strategy you will employ. There are three basic types of trades, and you can use one, or any combination of the three. Market conditions can change rapidly, so it is possible that all three of these trading strategies may be employed at some point.

The first type of trade is called a market order. This type of trade is the most basic of the three, requiring the broker to purchase the stock for you at the prevailing market rate. When you place a market order, whatever price the stock is at that moment will be your purchase price. Selling the stock "at market" works the same way. This type of trade is good for relatively stable stocks with low volatility.

The next type of trade is called a limit order.  For these types of orders, you would specify a certain price at which the broker will purchase or sell a particular stock for you. For limit orders, a trade will only be executed at the price you specify. Budget restrictions may necessitate this type of trade. The broker will only execute the buy at the exact price you specify. With a limit order, you can conceivably lock in a profit for a stock being sold as well.

Similar to a limit order is a stop order. Also known as stop-loss orders, these types of trades require the broker to sell a stock once it rises or falls to a level that you specify. Once that level is reached, the stop-loss becomes a market order, and the trade is executed. One disadvantage of this type of order is that if the price of a stock if falling rapidly, you may not get the stop-loss price you wanted. On the other hand, most higher volume stocks have good liquidity, so if you have locked in a profit, a stop order can make sure you keep that profit. At the same time it can prevent catastrophic losses by triggering a trade for a falling stock. This type of trade does not have the exact price limitation like the limit order, which can be a life saver in a volatile market.

Depending on your trading strategy, you have a number of options, but these three types of trades are the most common.

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