Contingent orders are an advanced type of order that is executed only if another order is executed first. A contingent order is one of several different types of Conditional Orders, with each type of order having a specific use.
If you would like to enter a trade under specified conditions, and do not want to wait by the computer for those conditions to be met, then using a Contingent Order may be your best strategy. Most online stock trading brokerages offer this type of order.
It is important for investors to understand both how to place Contingent Orders, as well as how these types of orders can help you to manage risk in your portfolio.
How And When To Use Contingent Orders
It is important to understand how and when to utilize Contingent Orders to effectively capitalize on the benefits of this type of trade. There are different types of Contingent Orders, including Multi-Contingent Orders where two or more conditions must be met, as well as single Contingent Orders which will be used in our example.
If you have been researching a security, and have decided to purchase a security at a specified price, you can utilize a Contingent Order to buy the security at your desired price without having to sit in front of the computer and wait for your conditions to be met.
Most online brokerages offer Contingent Orders in an easy to use format, and many have detailed instructions and investment specialists on hand to assist you. When placing Contingent Orders, you will simple enter the conditions under which you would like to buy a specified security – price you would like to pay, and time frame for the order.
It is important to utilize limit orders, and to thoroughly research a security before placing any type of order in the market. By utilizing a limit order versus a market order you can be sure that if the price of a security rises above your desired price, your order will not be filled at a price higher than you are willing to pay.
How Do Contingent Orders Manage Risk?
Contingent Orders can be an effective tool to manage risk in your portfolio when used properly. It is crucial to familiarize yourself with the fundamentals of your desired security in order to determine your desired entry and exit points.
A Contingent Order helps you mitigate risk in many ways. The first way is that you can only enter a trade at the price you have determined to be a good entry point. Contingent Orders will also prevent an order from being placed if the price of the security moves in the opposite direction.
Contingent Orders can also eliminate emotional decisions from your trading by automating the trading process. These types of orders can be useful tools to assist you in sticking with your trading plan. The less emotion come into play when investing, the better.
Always check with your broker to find out if Contingent Orders are available, and what conditions and restrictions may apply.