Stock Trading Order Types

Order (exchange)

An order in a market such as a stock market, bond market or commodities market is an instruction from a customer to a broker to buy or sell on the exchange.

These instructions can be simple or complicated. There are some standard instructions for such orders.

Market order

A market order is a buy or sell order to be executed by the broker immediately at current market prices. As long as there are willing sellers and buyers, a market order will be filled.

A market order is the simplest of the order types. Once the order is placed, the customer has no control over the price at which the transaction is executed. The broker is merely supposed to find the best price available at that time. In fast-moving markets, the price paid or received may be quite different from the price quoted.

A market order for a large number of shares may be split by the broker across multiple participants on the other side of the transaction, resulting in different prices for some of the shares.

Limit order

A limit order is an order to buy a security at no more (or sell at no less) than a specific price. This gives the customer some control over the price at which the trade is executed.

A buy limit order can only be executed by the broker at the limit price or lower. For example, if an investor wants to buy a stock but doesn’t want to end up paying more than $20 for the stock, the investor can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, the investor will not be caught buying the stock at $90 if the price rises sharply.

A sell limit order can only be executed at the limit price or higher.

A limit order may never be executed if the market price surpasses the limit before the order can be filled. Because of the added complexity, some brokerages will charge more for executing a limit order than they would for a market order.

Stop order

A stop order (sometimes known as a stop loss order) is an order to buy or sell a security once the price of the security reaches a specified price, known as the stop price. When the specified price is reached, the stop order is entered as a market order. Stop orders are used to try to limit an investor’s exposure in the market.

A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order with the broker at $40. If the share price drops to $40 for whatever reason, the broker will sell the stock at the next available price. This can limit the investor’s losses (if the stop price is at or below the purchase price) or lock in at least some of the investor’s profits (if the value of the security has risen between when the security was purchased and the stop order placed).

A buy stop order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an investor sells a stock short (borrows stock and sells it on the market hoping for a decline in price so he can buy back the stock later at a lower price before returning the stock to the lender), the investor may try to protect himself against losses if the price goes too high using a buy stop order.

With a stop order, the customer does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security’s price. Once the stop price is reached, the stop order becomes a market order. In a fast-moving market, the price at which the trade is executed may be much different from the stop price.

The use of stop orders is much more frequent for stocks, and futures, that trade on an exchange than in the over-the-counter (OTC) market.

Stop-limit order

A stop-limit order combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or to sell) at no more (or less) than a specified price.

As with all limit orders, a stop-limit order may never get filled if the security’s price never reaches the specified limit price.

Trailing-stop order

A trailing-stop order is an order entered with a stop parameter that creates a moving or trailing activation price, hence the name. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price.

Market-if-touched order

A market-if-touched order is an order to execute immediately at the best price available, once a trade occurs at the specified price or a better price.

This becomes a market order once the specific price is reached. It is used to ensure profits are realized if sufficiently favorable price moves occur, thus differing from a stop-loss order.

Discretionary order

A discretionary order is basically a market order, however it has the built ability for the broker to delay the execution at their discretion to try and get a better price.