At What Price Are You Comfortable Buying A Stock At?
The first thing you have to decide when you are going to buy a stock is "what price are you comfy with buying it at?" In other words, let's say you like the idea of buying XYZ and with XYZ trading at 50, you think it has 5 or 6 points of profit in it. Well, that would be great if you could buy it at 50 wouldn't it? But as experience will show you, very often when you go to buy XYZ it has already moved up a few points. Are you still willing to buy it at 53? See the point? Well, this is a big problem and it only gets worse with "market orders". Because of that, we are really against anyone placing a market order to buy a stock, before the market opens. Here is why: Let's say you call your broker at 8:30 am and tell him you want to buy 500 shares of XYZ "at the market". You are telling him that 1) you are willing to take XYZ at whatever price it is trading at when your order comes up. Therein lies the problem. Remember we are at the mercy of the market makers (the guys who make a market, or warehouse the stock for us to buy). They are privy to a lot of information folks and one of the biggest advantages they have is that they see all the orders for the particular stock. So here is a very typical situation. When you told the broker (or placed your online order) to buy XYZ "at the market" you have given the market maker the ability to "fill" you (or in other words execute your order) basically whenever they want. So let's suppose XYZ opens the next day at 52 (remember you liked it at 50) and instantly runs to 53.50 on all the orders that are getting filled. Now that market maker has your order in his book and you have agreed to let him fill you at "wherever the market is trading". Let's say the market maker sees the new orders starting to dry up. So what do you think he will do when the new orders stop coming in?? He will fill your market order is what he will do! So you will get filled at 53.50 even though that is the exact high of the morning and it's already pulling back. So in a matter of a few minutes, XYZ can be back to 51. but guess what? You own it at 53.50, meaning you are in the hole already. This is unacceptable. When you place a market order you are putting yourself on the "wheel", you might call it the "wheel of unfortune". Basically, the rules state that your order will go on a numerical "wheel" and your order goes on the wheel at the bottom, and one by one as the wheel rotates towards the top, orders are removed and filled. The idea is a "first come,first served" concept like standing in line. But in the real world, it doesn't work that way all the time. A certain amount of "market orders" are reserved for order execution at the "discretion of the market maker". Now if he has your order in his hand and he sees a lot of demand for the stock, do you think he will put you in at 52 while he has all these new orders flooding his books, or will he fill them first and when they dry up, use yours? We suggest you know the answer. So, remember these lessons. First never ever place a stock order "at the market" before the market is open for trading. Your chances of getting the stock you want, even remotely close to where it's trading is poor at best. We don't even suggest it while the market is open, but at least you have a "fighting chance" then. Next, buying a stock without getting a "feel" for the trading day is often suicide. In other words, if you send in a market order to buy a stock before the market is open, you are going to get that stock even if the market is in pull back mode and your stock falls like a rock. This is not a wise idea friends. So we will leave you with this: trying to buy a stock before the market even gives us a clue as to which way its going to go is a bad idea. Sending in a market order to buy a stock compounds the problem and assures you that you will be pretty disappointed! Next time we will look at the remedy for this problem.
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