With the proliferation of digital technology and the internet, many investors are opting to buy and sell stocks for themselves online instead of paying advisors large commissions to execute trades. However, before you can start buying and selling stocks, it’s important to understand 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.Understanding Stock Market Order Types

KEY TAKEAWAYS : Understanding Stock Market Order Types

  • Depending on your investing style, 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.
  • Stop orders, a type of market order, are triggered when a stock moves above or below a certain level; they 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 a straightforward type of financial transaction where you instruct your broker to buy or sell a security (like stocks or cryptocurrencies) at the current market price. In other words, you are telling the broker to execute the trade immediately at the best available price in the market.

For example, if you place a market order to buy a stock, the broker will purchase the stock for you at the current market price, whatever that price happens to be at the moment the order is executed. The same principle applies if you’re selling; the broker will sell the asset at the prevailing market price.

Market orders are generally considered quick and easy, but it’s important to note that the actual execution price may differ slightly from the last quoted price, especially in fast-moving markets. This is because the market price is constantly changing, and there may be slight delays in executing the order.

In summary, a market order is an instruction to your broker to buy or sell an asset immediately at the best available price in the market.

Limit Orders

A limit order is another type of financial transaction instruction given to a broker, but with a key difference from a market order. When you place a limit order, you specify the maximum price you are willing to pay when buying or the minimum price you are willing to accept when selling a security.

For example, if you want to buy a stock, you might set a limit order with a price lower than the current market price. This means you are willing to wait until the stock’s price falls to your specified limit before the order is executed. On the other hand, if you’re selling, you might set a limit order with a price higher than the current market price, indicating that you’re willing to wait for the price to rise to your specified level before selling.

The advantage of a limit order is that it gives you more control over the price at which your trade is executed. However, there’s a risk that your order may not be filled if the market doesn’t reach your specified price. It’s a trade-off between potentially getting a better price and the possibility of the trade not being executed.

In summary, a limit order is a type of financial instruction where you specify the maximum price you’re willing to pay (when buying) or the minimum price you’re willing to accept (when selling), providing more control over the execution price.

 

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 would 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

A stop-loss order is a risk management tool used in trading to limit potential losses on a position. It is an order placed with a broker to buy or sell a security once the price reaches a specific level, known as the stop price. The primary purpose of a stop-loss order is to protect an investor from further losses if the market moves against their position.

Here’s how a stop-loss order typically works:

  1. Setting the Stop Price: When placing a stop-loss order, you specify a stop price, which is the price at which the order will be triggered. If you’re holding a long position (meaning you’ve bought a security with the expectation that its price will rise), the stop price is usually set below the current market price. If you’re holding a short position (meaning you’ve sold a security with the expectation that its price will fall), the stop price is typically set above the current market price.
  2. Activation of the Stop-Loss Order: If the market price reaches or goes beyond the stop price, the stop-loss order is activated and becomes a market order. This means the order will be executed at the best available price in the market, which could be different from the stop price.
  3. Risk Management: The stop-loss order helps manage risk by automatically triggering a sale (or purchase in the case of a short position) when the price reaches a predetermined level. This can be particularly useful in volatile markets or if the trader is unable to monitor the market constantly.
  4. Broker Fees: Similar to other types of orders, there may be broker fees associated with the execution of a stop-loss order.

In summary, a stop-loss order is a risk management tool that automatically triggers a market order to sell (or buy) a security when its price reaches a specified level. This helps investors limit potential losses and manage risk in their trading strategies.

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Stop-Limit Order

A stop-limit order is a type of order that combines features of both a stop order and a limit order. It involves setting two prices: a stop price and a limit price. This order is used for more precise control over the execution price, particularly in volatile markets.

Here’s how a stop-limit order works, illustrated with an example:

Let’s say you own shares of XYZ stock, which is currently trading at $50 per share, and you want to limit potential losses but also control the price at which you sell.

  1. Setting the Stop Price: You set a stop price, which triggers the conversion of your stop-limit order into a limit order. In this example, you set a stop price of $45.
  2. Setting the Limit Price: Along with the stop price, you set a limit price. This is the price at which you are willing to sell the stock once the stop price is reached. In this example, you set a limit price of $44.
  3. Placing the Stop-Limit Order: You place a stop-limit order with the broker, specifying the stop price of $45 and the limit price of $44.
  4. Order Activation: If the price of XYZ stock drops to $45, the stop price is triggered, and your stop-limit order becomes a limit order with a limit price of $44.
  5. Limit Order Execution: The limit order is then executed at the best available price equal to or better than $44. If the market is moving quickly, there’s a chance that the order may not be filled if the stock price falls below $44 before the order is executed.

This scenario allows you to have more control over the price at which you sell, but it also comes with the risk that your order may not be filled if the market moves too swiftly.

In summary, a stop-limit order is a conditional order that combines a stop order and a limit order. It allows you to set a specific price (limit price) at which you want to sell a security after a predetermined price level (stop price) has been reached

All or None (AON)

An “All or None” (AON) order is a type of order in securities trading that instructs the broker to execute the entire order quantity at once or not at all. This means that the order should be filled completely, or none of it should be executed.

Here’s how an All or None order works:

  1. Order Placement: An investor places an All or None order with a broker, specifying the quantity of shares or units of a security they want to buy or sell.
  2. Execution Requirement: The order includes a condition that all of the specified quantity must be filled in a single transaction. If it’s not possible to execute the entire order at once, the order should not be partially filled.
  3. Order Execution: The broker attempts to execute the order in the market. If the entire order quantity is available at the desired price, the order is filled in its entirety. However, if there is insufficient liquidity or the entire quantity is not available at the specified price, the order remains open.
  4. Risk of Non-Execution: One risk associated with All or None orders is that if market conditions or available liquidity do not allow for the complete execution of the order, it may not be filled at all.

All or None orders are often used by investors who have specific requirements for the size of their positions. For example, an investor may want to buy or sell a particular number of shares to maintain a specific portfolio balance, and an All or None order helps ensure that the entire desired quantity is transacted in a single trade.

It’s important to note that the fulfillment of All or None orders depends on market conditions and the availability of the specified quantity at the desired price. If these conditions are not met, the order may go unfilled.

Immediate or Cancel (IOC)

An “Immediate or Cancel” (IOC) order is a type of order in securities trading that instructs the broker to execute the order immediately and, if not possible, to cancel the unfilled portion. This means that the broker is to fill as much of the order as possible right away, and any portion of the order that cannot be immediately filled is canceled.

Here’s how an Immediate or Cancel order works:

  1. Order Placement: An investor places an Immediate or Cancel order with a broker, specifying the quantity of shares or units of a security they want to buy or sell.
  2. Immediate Execution Attempt: The broker attempts to execute the order in the market immediately. The goal is to fill as much of the order as possible at the current market prices.
  3. Partial Fill Acceptance: If only a portion of the order can be filled immediately, that part is executed, and the remaining unfilled portion is canceled.
  4. Quick Decision Window: The time window for the order to be executed is very short. If the entire order cannot be filled within this brief period, the unfilled portion is canceled automatically.

IOC orders are useful when the investor wants to ensure that some part of the order is executed immediately, but they are willing to accept partial fulfillment if the entire order cannot be filled promptly. It’s a way to balance the desire for immediate execution with the understanding that complete fulfillment may not always be possible, especially in fast-moving markets or if there is low liquidity for the specific security.

Traders often use IOC orders when they need to act quickly on a market opportunity but are also willing to be flexible regarding the complete fulfillment of their order.

Fill or Kill (FOK)

A “Fill or Kill” (FOK) order is a type of order in securities trading that requires the immediate and complete execution of the entire order quantity, or the order is canceled entirely. The term “kill” in this context means to cancel the order if it cannot be filled in its entirety immediately.

Here’s how a Fill or Kill order works:

  1. Order Placement: An investor places a Fill or Kill order with a broker, specifying the quantity of shares or units of a security they want to buy or sell.
  2. Immediate Execution Requirement: The broker attempts to execute the entire order quantity in the market immediately. If the full order cannot be filled promptly, the order is canceled without any partial execution.
  3. No Partial Fills: The distinguishing feature of a Fill or Kill order is that it does not allow for partial fills. The order is either executed in its entirety at the current market prices or canceled immediately.
  4. Time Sensitivity: FOK orders are time-sensitive and must be executed immediately. If market conditions do not allow for the entire order to be filled at once, the order is terminated.

Fill or Kill orders are often used when an investor has a specific requirement for the complete and immediate execution of a trade. This can be crucial in situations where partial fulfillment is not acceptable, and the investor wants to ensure that the entire order is executed at the desired prices or not at all.

Traders might use Fill or Kill orders in fast-paced markets or when there’s a need for precise and rapid execution without any tolerance for partial fills.

Good ‘Til Canceled (GTC)

A “Good ’til Canceled” (GTC) order is a type of order in securities trading that remains active until it is either executed, canceled by the investor, or a predetermined expiration date is reached. Unlike some other order types that may expire at the end of the trading day, a GTC order can persist indefinitely until one of the specified conditions is met.

Here’s how a Good ’til Canceled order works:

  1. Order Placement: An investor places a Good ’til Canceled order with a broker, specifying the quantity of shares or units of a security they want to buy or sell, along with any other relevant parameters like the limit price.
  2. Persistence: The GTC order remains active in the market until one of the following events occurs:
    • The entire order is executed.
    • The investor manually cancels the order.
    • A predetermined expiration date is reached.
  3. Execution Flexibility: GTC orders provide flexibility for investors who don’t want to monitor the market constantly and want their orders to persist beyond the current trading day.
  4. Review and Modification: Investors can usually review and modify GTC orders periodically if their trading strategy or preferences change.

It’s important for investors to monitor their GTC orders regularly, especially if market conditions or their own investment goals shift, as the order will remain active until canceled.

In summary, a Good ’til Canceled order is a standing order that remains in the market until it is executed, manually canceled, or a specified expiration date is reached. This type of order is convenient for investors who want their trading instructions to persist over an extended period without the need to re-enter the order each day.

Day

A “Day” order is a type of order in securities trading that is only active for the duration of a single trading day. If the order is not executed by the end of the trading day, it is automatically canceled. This order type contrasts with other order durations, such as Good ’til Canceled (GTC), which can persist beyond the current trading day.

Here’s how a Day order works:

  1. Order Placement: An investor places a Day order with a broker, specifying the quantity of shares or units of a security they want to buy or sell, along with any other relevant parameters like the limit price.
  2. Intraday Validity: The Day order is only valid and active for the current trading day on the exchange where it is placed.
  3. Automatic Cancellation: If the order is not fully executed by the end of the trading day, it is automatically canceled. Any unfilled portion of the order will not carry over to the next trading day.
  4. Renewal: If the investor wants the order to persist beyond the current trading day, they need to re-enter the order on the next trading day.

Day orders are suitable for investors who have a specific short-term trading strategy or want to reassess their trading decisions on a daily basis. It ensures that the order is only active for the specific trading session, reducing the risk associated with orders that might inadvertently remain open for an extended period.

In summary, a Day order is a type of order that is valid and active only for the duration of a single trading day. If the order is not filled by the end of the day, it is automatically canceled, and investors need to re-enter the order if they want it to persist.

Take Profit

A “Take Profit” order is a type of order used in securities trading to automatically close a position and lock in profits when the price of a security reaches a specified level. It is a tool commonly employed by investors to set a target selling price for their trades, ensuring that they capitalize on favorable market movements.

Here’s how a Take Profit order works:

  1. Order Placement: An investor places a Take Profit order with a broker, specifying the quantity of shares or units of a security they want to sell and the target price at which they want to take profits.
  2. Automatic Execution: When the market price of the security reaches the specified target price, the Take Profit order is triggered and automatically converted into a market order. This market order is then executed at the best available price in the market.
  3. Profit Lock-In: The purpose of the Take Profit order is to lock in profits by automatically selling the security when it reaches the desired price level. This helps investors avoid the risk of the market reversing and eroding potential gains.
  4. Risk Management: Take Profit orders are part of a risk management strategy, allowing investors to define their profit-taking objectives in advance and remove emotional decision-making from the trading process.
  5. Flexibility: Investors can use Take Profit orders in conjunction with other types of orders, such as Stop-Loss orders, to manage both potential gains and losses on their trades.

It’s important to note that the execution of a Take Profit order is not guaranteed at the exact specified price, especially in fast-moving markets where prices can change rapidly. The order will be executed at the best available price once the target level is reached.

In summary, a Take Profit order is a pre-set instruction to sell a security at a specified price to lock in profits when the market reaches a favorable level.

 

The Bottom Line : Understanding Stock Market Order Types

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.