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Stock Market Order Types 101
Make Smarter Trades with the Right Order Type
Joey Choy, Bervyn Chang & Zee Lai
December 22, 2024
When it comes to buying or selling stocks, knowing how to choose the right order type is essential. Each type of stock market order has unique features, advantages, and risks, so understanding the basics can help you make smarter trades and better manage your portfolio. In this article, we’ll cover 3 essential order types — market, limit and stop-limit — and break down how and when to use each one.
Understanding the Basics: Types of Orders You Should Know
Market Order: An order to buy or sell a stock immediately at the current market price
Limit Order: An order to buy or sell a stock only at a specific price or better
Stop-Limit Order: A combination of a stop-loss and a limit order, allowing you to set both a trigger price (a.k.a stop price) and a limit price for your trade
How Each Order Works in Real-World Scenarios
1) Market Order
Let’s say you want to buy shares of Company ABC immediately. The current market price is trading at $100. By placing a market order, your trade will go through instantly at around $100. However, note that the actual price that is executed may differ slightly from $100 because of slippage. During that few seconds when you submit the trade, price could have move to $101.50 and your trade could be done at $101.50.
2) Limit Order
If you think Company ABC is too expensive at $100 and perhaps, you only want to buy if it drops to $98, you’d place a buy limit order. Your trade will only execute if the price falls to $98 or lower.
3) Stop-Limit Order
Let’s say you own Company ABC shares at $98. If price falls to $95, you want to let go because you are not too optimistic about the stock anymore. You can set a stop-limit order with a trigger price (a.k.a stop price) at $95 and a limit price at $95 as well.
So if the stock price indeed falls to $95, your stop-limit order will be triggered and a limit order to sell at $95 will be submitted to the exchange.
However, if say the stock gap down, opened at $90 and continue falling throughout the trading day, the stop-limit order you’ve set will not execute because price did not touch your $95 trigger price.
Pros and Cons of Each Order Type
Order Types | Pros | Cons |
|---|---|---|
Market Order | Fast execution; guarantees that your order will be filled | No control over the price; you might end up paying a higher price for a buy order or selling at a lower price if the market fluctuates quickly |
Limit Order | Full control over the price; your order will only be filled at your specified price or better | No guarantee of execution if the stock doesn’t hit your limit price |
Stop-limit Order | Protects against large losses by setting a minimum acceptable price for selling a stock | If the stock price falls below the limit price, the order might not execute, leaving you exposed to further losses |
Stop-limit orders are a popular tools for managing risk, but they work best when used thoughtfully. Ensure that you set a realistic trigger price (a.k.a stop price) and limit price with respect to the stock’s volatility. Note that you should have the discipline to not shift down or withdraw your stop-limit order once you have solidify your trading plan.
Learning to use different types of stock market orders can give you more control over your trades, help you manage risk, and improve your overall strategy. By understanding the different order types available, you’re better equipped to make smarter, more informed trading decisions.
Remember, each order type has its place in a well-rounded trading approach. Take your time to experiment and see how these orders work in real market conditions. Many brokerage platforms even offer “paper trading” accounts for practice. With time and experience, you’ll find the order types that best fit your style and goals.
Happy trading!
Hope you have found the above useful 😃
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