Smart Order Execution for Stocks and ETFs Doesn’t Happen by Chance
Choosing the right investments is half the battle. The other half is knowing when to buy and sell.
The invention of commission free ETF trading (NYSEARCA:DBC) doesn’t mean you should be ignorant about the types of buy and sell orders you place. The same can be said of rock-bottom online stock commission rates. This is true whether you’re a short-term trader or a long-term investor. So, if you’re going to trade, what’s the best way to execute a stock or ETF (NYSEARCA:VNQ) order? A market order at current prices or a limit order at a pre-determined price?
If you were to conduct a random survey of anybody on Wall Street about what their definition of “good” trade execution is and you’re bound to get many different answers. For instance, to the high-frequency trader or HFT, “good” execution would probably mean anything that allows them to illegally front-run other market participants without getting caught. Aside from this illicit group, what about the rest of us?
For the buyer of individual stocks or ETFs (NYSEARCA:SCHB), “good” execution might mean paying the lowest price on the bid/ask offer. For the seller, it might mean getting the highest price. While these conclusions are pretty obvious, there’s a litany of choices the individual investor must make.
Do you put in a:
Stop Loss Order?
Day Order or GTC?
To get the inside scoop about how investors with big trades ($10 million+) execute their orders, I also recently conducted an in-depth interviewed institutional trader Andy McOrmond, Managing Director @ WallachBeth who gave listeners to my weekly Index Investing Show, some great tips about smarter trade execution. You can listen to “Smart Order Execution Doesn’t Happen by Accident.”
Beyond the above mentioned order choices, my latest video titled “3 Commandments for Trading Stocks and ETFs” examines three aspects of trading that get overlooked: 1) Trading at the open and the close, 2) Trading with odd-lot shares, and 3) Trading with borrowed money, or margin.
Finally, the idea that long-term investors should buy-and-hold (Nasdaq:VFINX) forever is utter propaganda. Even the least active investor, will at some eventual point need to buy and sell securities within their portfolio. Why? Because people’s investment time horizons are variable but never forever! That even includes those of you who are fortunate enough to have the life-expectancy of Methuselah.
In summary, what a person sows is what they reap. If you’re blindly entering stock and ETF orders (NasdaqGM:QQQ) without a clear understanding of the consequences, you’ll surely reap the unexpected results of those decisions, which may not be to your liking. On the other hand, by placing orders that conform to your desired price, your overall strategy, and your execution time frame, you’ll be on your way to making savvier trades.
Ron DeLegge is the Founder and Chief Portfolio Strategist at ETFguide. He’s inventor of the Portfolio Report Card which helps people to identify the strengths and weaknesses of their investment account, IRA, and 401(k) plan. Get paid $100 if your portfolio scores an “A.”