Types of Orders Explained

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The Basics of Trading a Stock: Know Your Orders

With the growing importance of digital technology and the internet, many investors are opting to buy and sell stocks for themselves rather than pay advisors large commissions to execute trades. However, before you can start buying and selling stocks, you must know the different types of orders and when they are appropriate.

In this article, we’ll cover the basic types of stock orders and how they complement your investing style.

Key Takeaways

  • Several different types of orders can be used to trade stocks more effectively.
  • A market order simply buys or sells shares at the prevailing market prices until the order is filled.
  • A limit order specifies a certain price at which the order must be filled, although there is no guarantee that some or all of the order will trade if the limit is set too high or low.
  • Commissions are usually lowered on market orders.
  • Stop orders, a type of limit order, are triggered when a stock moves above or below a certain level and are often used as a way to insure against larger losses or to lock in profits.

Market Order vs. Limit Order

The two major types of orders that every investor should know are the market order and the limit order.

Market Orders

A market order is the most basic type of trade. It is an order to buy or sell immediately at the current price. Typically, if you are going to buy a stock, then you will pay a price at or near the posted ask. If you are going to sell a stock, you will receive a price at or near the posted bid. 

One important thing to remember is that the last-traded price is not necessarily the price at which the market order will be executed. In fast-moving and volatile markets, the price at which you actually execute (or fill) the trade can deviate from the last-traded price. The price will remain the same only when the bid and ask prices are exactly at the last-traded price. 

Market orders do not guarantee a price, but they do guarantee the order’s immediate execution.

Market orders are popular among individual investors who want to buy or sell a stock without delay. The advantage of using market orders is you are guaranteed to get the trade filled; in fact, it will be executed ASAP. Although the investor doesn’t know the exact price at which the stock will be bought or sold, market orders on stocks that trade over tens of thousands of shares per day will likely be executed close to the bid and ask prices. 

Limit Orders

A limit order, sometimes referred to as a pending order, allows investors to buy and sell securities at a certain price in the future. This type of order is used to execute a trade if the price reaches the pre-defined level; the order will not be filled if price does not reach this level. In effect, a limit order sets the maximum or minimum price at which you are willing to buy or sell. 

For example, if you wanted to buy a stock at $10, you could enter a limit order for this amount. This means that you would not pay a penny over $10 for that particular stock. However, it is still possible that you buy it for less than the $10 per share specified in the order.

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There are four types of limit orders:

  • Buy Limit: an order to purchase a security at or below a specified price. Limit orders must be placed on the correct side of the market to ensure they will accomplish the task of improving price. For a buy limit order, this means placing the order at or below the current market bid. 
  • Sell Limit: an order to sell a security at or above a specified price. To ensure improved price, the order must be placed at or above the current market ask. 
  • Buy Stop: an order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been reached (known as the stop level). Buy stop are orders placed above the market and sell stop orders placed below the market (the opposite of buy and sell limit orders, respectively). Once a stop level has been reached, the order will be immediately converted into a market or limit order. 
  • Sell Stop: an order to sell a security at a price below the current market ask. Like the buy stop, A stop order to sell becomes active only after a specified price level has been reached. 

Market and Limit Order Costs

When deciding between a market or limit order, investors should be aware of the added costs. Typically, the commissions are cheaper for market orders than for limit orders. The difference in commission can be anywhere from a couple of dollars to more than $10. For example, a $10 commission on a market order can be boosted up to $15 when you place a limit restriction on it. When you place a limit order, make sure it’s worthwhile.

Let’s say your broker charges $7 for a market order and $12 for a limit order. Stock XYZ is presently trading at $50 per share and you want to buy it at $49.90. By placing a market order to buy 10 shares, you pay $500 (10 shares x $50 per share) + $7 commission, which is a total of $507. By placing a limit order for 10 shares at $49.90 you pay $499 + $12 commissions, which is a total of $511.

Even though you save a little from buying the stock at a lower price (10 shares x $0.10 = $1), you will lose it in the added costs for the order ($5), a difference of $4. Furthermore, in the case of the limit order, it is possible that the stock doesn’t fall to $49.90 or less. Thus, if it continues to rise, you may lose the opportunity to buy.

Additional Stock Order Types

Now that we’ve explained the two main orders, here’s a list of some added restrictions and special instructions that many different brokerages allow on their orders:

  • Stop-Loss Order: Also referred to as a stopped market, on-stop buy, or on-stop sell, this is one of the most useful orders. This order is different because, unlike the limit and market orders, which are active as soon as they are entered, this order remains dormant until a certain price is passed, at which time it is activated as a market order. For instance, if a stop-loss sell order were placed on the XYZ shares at $45 per share, the order would be inactive until the price reached or dropped below $45. The order would then be transformed into a market order, and the shares would be sold at the best available price. You should consider using this type of order if you don’t have time to watch the market continually but need protection from a large downside move. A good time to use a stop order is before you leave on vacation. 
  • Stop-limit Order:These are similar to stop-loss orders, but as their name states, there is a limit on the price at which they will execute. There are two prices specified in a stop-limit order: the stop price, which will convert the order to a sell order, and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price or better. This can mitigate a potential problem with stop-loss orders, which can be triggered during a flash crash when prices plummet but subsequently recover. 
  • All or None (AON): This type of order is especially important for those who buy penny stocks. An all-or-none order ensures that you get either the entire quantity of stock you requested or none at all. This is typically problematic when a stock is very illiquid or a limit is placed on the order. For example, if you put in an order to buy 2,000 shares of XYZ but only 1,000 are being sold, an all-or-none restriction means your order will not be filled until there are at least 2,000 shares available at your preferred price. If you don’t place an all-or-none restriction, your 2,000 share order would be partially filled for 1,000 shares. 
  • Immediate or Cancel (IOC): An IOC order mandates that whatever amount of an order that can be executed in the market (or at a limit) in a very short time span, often just a few seconds or less, be filled and then the rest of the order canceled. If no shares are traded in that “immediate” interval, then the order is canceled completely. 
  • Fill or Kill (FOK): This type of order combines an AON order with an IOC specification; in other words, it mandates that the entire order size be traded and in a very short time period, often a few seconds or less. If neither condition is met, the order is canceled. 
  • Good ‘Til Canceled (GTC): This is a time restriction that you can place on different orders. A good-til-canceled order will remain active until you decide to cancel it. Brokerages will typically limit the maximum time you can keep an order open (active) to 90 days. 
  • Day: If you don’t specify a time frame of expiry through the GTC instruction, then the order will typically be set as a day order. This means that after the end of the trading day, the order will expire. If it isn’t transacted (filled) then you will have to re-enter it the following trading day. 
  • Take Profit: A take profit order (sometimes called a profit target) is intended to close out the trade at a profit once it has reached a certain level. Execution of a Take Profit order closes the position. This type of order is always connected to an open position of a pending order. 

Not all brokerages or online trading platforms allow for all of these types of orders. Check with your broker if you do not have access to a particular order type that you wish to use.

The Bottom Line

Knowing the difference between a limit and a market order is fundamental to individual investing. There are times where one or the other will be more appropriate, and the order type is also influenced by your investment approach.

A long-term investor is more likely to go with a market order because it is cheaper and the investment decision is based on fundamentals that will play out over months and years, so the current market price is less of an issue. A trader, however, is looking to act on a shorter term trend in the charts and, therefore, is much more conscious of the market price paid; in which case, a limit order to buy in with a stop-loss order to sell is usually the bare minimum for setting up a trade.

By knowing what each order does and how each one might affect your trading, you can identify which order suits your investment needs, saves you time, reduces your risk, and, most importantly, saves you money.

Day Trading Encyclopedia

Stock Brokers Order Types

Stock Order Types

Traders have the option to place different types orders. Certain order types may be appropriate for specific scenarios

In order to place a stock trade, the order type has to be specified before the trade gets executed. With the exception of the market order, all orders need to be provided with a time in force selection, meaning how long the order should stay active until it is filled. A good-to-cancel (GTC) order will keep the order active until it is canceled. This order will stay active only during market trading hours but for infinite days until manually cancelled or filled. A good for day (DAY) order will keep the order active until the market close for that day. A fill-or-kill (FOK) is condition that the order must be filled in its entirety immediately or else cancelled immediately. This order is useful for large shares in a volatile market when a trader wants to fill shares at a set limit immediately

Market Order

Market orders the fastest orders and receive top priority in the queue to fill at the nearest inside price. With a fast moving market and or thin liquidity stocks, the actual fills can be detrimental. What you see may not be what you get. It’s very easy to get filled on a temporary spike at the highs before the stock reverts back down in the blink of an eye. Market orders are best used with thicker liquidity stocks. If execution, not price, is top priority, they market orders are best in terms of speed of fills.

Limit Order

Limit orders are placed with a limit price meaning the order will fill up to or down to a specific limit price. This protects the trader from over paying for buy and sell transactions in case a stock makes a flash spike or drop and reverts right back to where it was trading. Algorithms are notorious for spiking and dropping prices when a blast of market orders hit the tape.

Stop Order

These are limit orders that can be placed based on a pre-specified price or a trailing increment or percentage. Once the specific price/increment is hit, it will trigger a market order to exit the specified number of shares or all of the shares in the position. Limit orders can be specified on exits rather than a market order, but these have of risk of not being filled if the price moves too quickly.

Conditional Order

A conditional order is an order that will only execute if certain specified conditions are met. These orders allow for prudent traders or investors to engage in trades without having to be present. You must first specify a price condition then specify an action if that condition triggers. Think in terms of IF THEN. Traders utilizing technical analysis may be waiting for a stock price to form a breakout higher, but expect an initial pullback on the first attempt. The logic would translate into something like ‘if AAPL trades above $106, then place a buy limit order at $105.90’. The trader would fill in the appropriate conditions and prices in the order window on the broker platform.

Conditional orders allow traders to use “if/then” criteria to trigger orders.

Trading Order Types

Market, Limit, Stop and If Touched

All trades are made up of separate orders that are used together to make a complete trade. All trades consist of at least two orders: one to get into the trade, and another order to exit the trade. Order types are the same whether trading stocks, currencies or futures.

A single order is either a buy order or a sell order, and an order can be used either to enter a trade or to exit a trade. If a trade is entered with a buy order, then it will be exited with a sell order. If a trade is entered with a sell order, the position will be exited with a buy order.

For example, if a trader expected a stock price to go up, the simplest trade would consist of one buy order to enter the trade, and one sell order to exit the trade, hopefully at a profit after the price has actually risen.

Alternatively, if a trader expected a stock price to go down, the simplest trade would consist of one sell order to enter the trade, and one buy order to exit the trade. This last example, called shorting or shorting a stock, is when a stock is sold first and then bought back later.

Traders have access to many different types of orders that they can use in various combinations to make trades. Below, the main order types are explained, along with how these orders are used in trading.

Market Orders (MKT)

Market orders buy or sell at the current price, whatever that price may be. In an active market, market orders will always get filled, but not necessarily at the exact price that the trader intended. For example, a trader might place a market order when the best price is 1.2954, but other orders might get filled first, and the trader’s order might get filled at 1.2955 instead.

Market orders are used when you definitely want your order to be processed and are willing to risk getting a slightly different price. If you are buying, your market order will get filled at the ask price, as that is the price someone else is currently willing to sell for.

If you are selling, your market order will get filled at the bid price, as that is the price someone else is currently willing to buy at.

Limit Orders (LMT)

Limit orders are orders to buy or sell an asset at a specific price or better. Limit orders may or may not get filled depending on how the market is moving, but if they do get filled it will always be at the chosen price, or better.

For example, if a trader placed a limit order with a price of $50.50, the order would only get filled at $50.50 or better. In this case, a better price would be below $50.50, if it got filled at all. Limit orders are used when you want to make sure that you get a suitable price and are willing to risk not being filled at all. The order only gets filled if someone is willing to sell to you if you are buying at $50.50, or below.

If you wanted to sell at $50.50 or better—which would be above $50.50, in this case—you could use a sell limit order. The order will only be executed if someone else is willing to buy from you at $50.50 or above.

Stop Orders (STP)

Stop orders are similar to market orders in that they are orders to buy or sell an asset at the best available price, but these orders are only processed if the market reaches a specific price.

For example, if the current price of an asset is 1.2567, a trader might place a buy stop order with a price of 1.2572. If the market trades at 1.2572 or above, the trader’s stop order will be processed as a market order and will then get filled at the current best price.

Stop orders are processed as market orders, so if the stop or trigger price is reached, the order will always get filled, but not necessarily at the price that the trader intended. Stop orders will trigger if the market trades at or past the stop price. For a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price.

Stop orders can be used to enter a trade, but also used to exit a trade, typically called a stop loss. For example, if a trader buys a stock at $50.50, they may place a sell stop at $50.25. If the price reaches $50.25 or below, the sell order will be executed, getting the trader out of the position at $50.25 or below, limiting the loss on the position.

If a trader is short at $50.50, they may place a buy stop at $50.75 to limit their loss. If the price reaches $50.75 or above the buy stop will execute, closing the trader’s position at $50.75 or above.

Stop Limit Orders (STPLMT)

Traders will commonly combine a stop and a limit order to fine-tune what price they get. To open a trade, a trader could place a buy stop limit at $50.75. Assume the stock currently trades at $50.50. If the price reaches $50.75 the buy stop limit order will be executed, but only if the order can be executed at $50.75 or below.

This also works to initiate a short position. If the current price is $25.25, and a trader wants to go short if the price falls to $25.10, they could place a sell stop limit at $25.10. If the price reaches $25.10 the order will be executed, but only if the order can be executed $25.10 or above.

When using a stop limit order, the stop and limit prices of the order can be different. For the buying example, our trader could place a buy stop at $50.75, but with a limit at $50.78. The buy stop kicks in and buys if $50.75 is reached, but due to the limit order, the order will only buy up to $50.78. This assures that the trader buys if $50.75 is reached, but only if the market allows them to do so below $50.78.

Stop limit orders will remain pending until someone else is willing to transact at the stop limit order price(s), or better.

Market If Touched Orders

A buy MIT (“market if touched”) order price is placed below the current price, while the sell MIT order price is placed above the current price. For example, assume a stock is trading at $16.50. A MIT buy order could be placed at $16.40. If the price moves to $16.40 or below, the trigger price, then a market buy order will be sent out.

For a sell order, assume a stock is trading $16.50. A MIT sell order could be placed at $16.60. If the price moves to $16.60, the trigger price, then a market sell order be sent out.

Limit If Touched Orders (LIT)

A LIT (“limit if touched”) order is like a MIT order, but it sends out a limit order instead of a market order. For a LIT order, there is a trigger price and a limit price.

For example, assume a stock is trading at $16.50. A LIT trigger could be placed at $16.40. In addition, a limit price of $16.35 could be set. If the price moves to $16.40 or below, the trigger price, then a limit order will be placed at $16.35. Since it is a limit order, the buy will only be executed at $16.35 or below.

For a sell order, assume a stock is trading at $16.50. A LIT trigger could be placed at $16.60. In addition, a limit price of $16.65 could be set. If the price moves to $16.60 or above, the trigger price, then a limit order will be placed at $16.65. Since it is a limit order, the sell trade will only be executed at $16.65 or above.

Summary of Trading Order Types

A market order is used to enter or exit a position quickly. It will be filled, but not necessarily at the price expected, called slippage.

A limit order is used to cap the amount that is paid on a buy order or to sell at a specific price, or above, on a sell order. A stop order is used to capture a specific price or higher, on a buy order, or to capture a specific price or lower, on a sell order.

A buy stop limit order is used to buy at a specific price or lower or within a range, while a sell stop limit is used to sell at a specific price or higher, or within a range. This combines elements of the basic stop and limit order types.

Market if touched orders trigger a market order if a certain price is touched. A limit if touched order sends out a limit order if a specific trigger price is reached.

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