When trading UK penny stocks and shares, or any other kind of securities, it’s important to learn 3 common order types: market, stop and limit, and when you might use them.

1. Market Order

Definition:

A market order is an instruction to buy or sell a security at the market’s current best available price. When you place a market order, you are essentially telling your brokerage for stocks to execute the order immediately, regardless of the price.

When to use:

A market order is generally appropriate when you think a security is priced right, when you are sure you want a fill on your order, or when you want an immediate execution. However, keep in mind that market fluctuations may cause the execution price of your trade to vary from the current price.

2. Stop Order

Definition:

A stop order, often known as a stop-loss order, is utilized to minimize potential losses or protect profits. It becomes a market order when the stock reaches a specified trigger price, known as the stop price. In the event that the stock price does not reach the stop price, the order will not be executed. Stop orders can be used for both buying and selling securities.

When to use:

A stop order is commonly used to manage risks. If you have a specific price at which you want to sell a security to limit potential losses, you can set a stop order. If the stop price is reached, the stop order becomes a market order and is executed at the best available price.

3. Limit Order

Definition:

A limit order allows you to specify the maximum price you’re willing to pay when buying (with a buy limit) or the minimum price you’re willing to accept when selling (with a sell limit) a security. While the order will only be executed if it meets or exceeds the specified limit price, it is important to note that execution cannot be guaranteed.

When to use:

A limit order is best suited when you have a specific target price in mind or when you want to take advantage of potential price fluctuations. By setting a limit order, you can ensure that your trade will be executed only if the specified price is reached or better.

Practice Makes Perfect

Besides understanding the differences between these order types, you also need to make a quick decision on which order type to use when spotting a trading opportunity. A demo account might help.

Many online brokers offer demo accounts. A demo account simulates real-time market conditions. It allows you to open a position on penny stocks, bonds, CFDs and many other great assets with virtual funds. Under such a risk-free environment, you can experiment, learn from mistakes, and refine your trading skills before committing real money.