Often an advantageous stock trading tool, the alternative order has two parts, and when (if) one part fills, the other cancels. It is set to both act on possible stock gains and to avoid loss. Following is some information on the alternative order in investing.
What is a Stock Trading Alternative Order?
The alternative order allows investors to set a high and low price for a buy, and a high and low price for a sell. If the stock moves mainly in one direction, and eventually enacts one order for the buy or sell, the other is canceled, as it is then simply irrelevant.
Example Stock Trading Alternative Order to Buy
Suppose that a stock is trading at around $4 per share. An investor is looking to take on shares if it should drop to a certain lower, more inexpensive trading value, or if it should show upward momentum.
He could set an alternative order to buy at $3 or $5. If the stock then dropped to the lower price, shares would be bought (like in a limit order), or, if it rose up to $5, shares would be purchased (as in a stop exchange). If the order acts at one price, it cancels the other.
Example Alternative Order to Sell in Investing
Suppose that a trader instead owns shares of a security that is trading at $8 per share. She wants to unload the stock if it should drop to a certain price, to prevent further potential loss, and she also wants to be able to sell shares at a higher price to secure favorable returns if it should rise. She could set an alternative order to sell at $6.50 or at $10. If either price is hit and the order fills, the other mark to sell cancels.
Investing Advantage of the Alternative Order
The alternative order essentially combines two wise trades, utilizing the components of the limit and the stop simultaneously. Whereas the limit buy purchases shares at or below a certain value, and the stop buys rising shares of stock, this order can allow for either, filling whichever happens first and canceling the other.
Conversely, where a limit sells stock that has risen to or above a certain mark, and a stop sells falling stock to cut loss, the alternative exchange can fill one, depending on the course that the stock takes, and it will then cancel the other.
This exchange combines two very basic orders. It allows investors to capitalize on gains or cut loss, depending on the direction of a security’s movement.