In the world of investments and finance, the use of an alternative order may seem like a waste of time. However, this common strategy can be used to great advantage. Essentially, an alternative order involves two orders that are issued to a stockbroker at the same time, with the understanding that in order to comply with one order, the second order must be rendered null and void. Here are some reasons why this approach to buying and selling stocks actually works quite well, and can result in making a great deal of money.
Alternative orders are a great way to contain the potential for losses when engaging in some sort of an investment transaction. For example, if an investor has a thousand shares of stock that are currently valued at a price of $8.00 US Dollars (USD) per share, an alternative order can be employed to limit the chances for losing money on the transaction.
The buy limit order would come into effect if the stock’s worth dipped below a certain point. The buy stop order would take effect if the value of the stock rose above a specified amount per share. Determining the amounts to use with the buy stop and the buy limit would involve naming figures that were below and above the current market price of the stock. In either case, both portions of the alternative order would be considered complete once either the buy stop or the buy limit order had been executed.
While the main advantage of an alternative order is to limit the amount of money that can be lost in a transaction, it should be noted that the alternative order will also limit the amount of money that can be made off the transaction as well. For instance, if the stock prices continues to climb above the amount used to set the buy stop price, then no further funds will be made on the stock, without issuing another set of instructions to the stockbroker. Still, as a device for limiting losses, the alternative order works very well, and it usually does not take long to communicate the next move to the stockbroker in any case.
Learning when to use the strategy of an alternative order takes some time and practice. An experienced broker or financial advisor can often shed some light on whether a given situation is right for this type of transaction. As the investor becomes more proficient in understanding market conditions and trends, he or she may come to understand instinctively when an alternative order is just the right strategy to employ.
