You’ve perused our marijuana stock databases, done your investing homework, and found a few cannabis stocks that you want to own. Now what do you do?
Assuming you already have a brokerage account (If you don’t yet, have no fear, it’s easier than it sounds) the next step is to go into the market and place your trade. This is one of the simpler aspects of investing, but there are a few things you should pay attention to.
When you log in to your online brokerage account, or call your representative to place a trade, there’s some information that you are going to need to provide.
The stock’s ticker symbol
Quantity (increments of 100 shares are ‘round lots’, however trading in round lots isn’t nearly as important today as it once was)
Direction (Buy or Sell)
Order Type (Market, Limit, Stop and Stop Limit)
The Four Basic Order Types:
A market order ‘says’ that you wish to buy or sell the stock at the current market price. It’s very important to understand that the current market price is not the last price you see in the stock’s quote! The current market ‘price’ is actually two prices, a bid and an ask. Let’s take a look at a sample stock quote to see bids and offers in action.
This a sample quote of Tetra Bio Pharma (CSE:TBP) on the Canadian Securities Exchange. The bid price of CAD$ 0.730 represents the highest price that someone in the market is currently willing to buy TBP shares at. The bid size is the quantity that they are willing to buy at the bid price. If at the time of this quote you placed a market order to sell TBP for a quantity of less than 40,500 shares, you would get filled at CAD$ 0.730.
On the other hand, the ask price is the lowest price that someone is willing to sell shares of Tetra Bio Pharma at. The ask quantity represents the number of shares that they are willing to sell at CAD$ 0.750. If you were to place a market order to buy at the time of this quote for a quantity less than the ask size of 114,000 shares you would get filled at CAD$ 0.750.
In this case, the difference between the bid and ask (the bid ask spread) is quite small (CAD$ 0.02), but other times it can be quite large. When you place a market order you are effectively paying the bid ask spread for the privilege of having your order executed immediately. In the times where it is small, that’s a small price to pay for immediacy, but there are other times where it’s just not worth it. For those cases there are limit orders.
Limit orders allow investors to specify a maximum price that they wish to buy a stock, or a minimum price that they wish to sell. Instead of leaving it up to ‘the market’, limit orders give investors a bit more control and prevent slippage. That being said, this control comes at a price, with limit orders there is no guarantee of execution (because the market may never reach your limit price), nor will it be immediately filled if the market is not at or better than the limit price you specified at the time of submission. Especially in the illiquid and volatile marijuana stocks, using limit orders is important. Remember, the price at which you get in a stock determines your returns. Getting a good fill can even be the difference between making money on a trade and losing money.
A stop order is a market buy or sell order (often times a sell order) that is triggered when the stock trades at a certain price. They are often called stop-loss orders, because investors use them to help limit losses in the event that a position moves against them. When you place a stop order, you have to specify a stop price. If the market reaches your stop price, the stop order will be sent to be executed.
Stop Limit Order:
Stop limit orders are just a combination of the two previous order types. They work just like stop orders in that they are triggered when a stock reaches a certain price, however instead of sending a market order when triggered, they send a limit order. This means that when you place a stop limit order, not only do you need to specify a stop price, but also a limit price. As with all limit orders, the benefit here is that you get some say over the price that you get filled at. That being said, there is a tradeoff, if your stop gets triggered, but your limit order doesn't get filled (because the market moved swiftly past your stop price), you will be left holding the stock at a greater loss.
There are a few less commonly used order types and conditions, but knowing these four types and when to use them will have you well on your way to trading marijuana stocks with confidence.
Now learn about the inner workings of an ETF