Investing Help: 5 Different Order Types & When You Need to Use Each

By Chika

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Last Updated: January 9, 2023

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In the world of investing, once you decide which shares to buy, you will need to put in an order.

Your trading platform usually offers you several different order types to choose from. They each have their purpose and you should use them depending on what your aims are when trading. Knowing the different order types and how to use them is crucial if you want to be successful in trading.

In this article, we look at the different order types and how to utilize them.

 

 

Investing: 5 Order Types

1. Market order

A market order is a request to purchase or sell a stock at the best price currently being offered on the market.

When placing an order for a trade, you can use this option by default because it is the most straightforward. It indicates that your deal will be carried out at the current market price without regard to any established price restriction.

With a market order, timing is key. If you want your order to be completed right away, this is the ideal choice.

Market orders should be placed only during market hours. A market order placed when markets are closed would be executed at the next market open. This could be significantly higher or lower from its prior close.

It's crucial to remember that the market order does not ensure the price. A market order normally guarantees an execution but not a certain price. In actuality, your market order may not be executed at the price at which it was last traded. The price differential may vary in a market that is dynamic and variable.

 

2. Limit order

A limit order is a buy/sell order that specifies a maximum price to be paid or a minimum price to be received for a stock (the "limit price"). Only at the specified limit price or better will the order be completed. 

Thus, only the limit price or a lower one will be used to execute your buy order. Sell limit orders will only be completed if the price is greater than the limit or at the limit price.

Limit orders give you greater control of the prices you want to trade at. They aid in ensuring that an investor does not pay more for the stock than a predetermined price, even if they do not guarantee execution.

 

3. Stop order

When the stock price crosses over or falls below a specific price, known as the stop price, a stop order is a form of market order to buy or sell the stock.

The order becomes a market order and is completed at the following available market price if the stock hits the stop price.

Stop orders come in two varieties: buy-stop orders and sell-stop orders.

  • At a stop price greater than the going market rate, a buy-stop order is placed.
  • At a stop price lower than the going market rate, a sell-stop order is placed.

Traders can secure some profits and reduce their losses with this method.

However, keep in mind that a stop order may be activated by momentary market swings in the price of a stock. As such, a stop price should be selected carefully. Usually, this should be outside key trading zones (support or resistance).

Additionally, the stop price is merely a trigger that turns a stop order into a market order; it is not the guaranteed execution price for a stop order. If there is a lot of market volatility, the execution price for this market order may be very different from the stop price.

 

4. Stop-limit order

This order combines the benefits of limit and stop orders.

After a stop price has been reached, the order will be executed at that price or a better one. The stop-limit order converts to a limit order to buy or sell at the limit price or better if the stop price is met.

The advantage of this choice is that the investor may decide how much to pay to execute the transaction. But keep in mind that this kind of order may be activated by brief market swings in the price of a stock, therefore stop and limit prices should be carefully chosen.

For a stop-limit order, the stop price and the limit price do not have to be the same.

For instance, a sell-stop limit order may have a limit price of $13 and a stop price of $15. Although it could only be executed at $13 or above, this order would become an active limit order if market prices reached $15.

 

5. Stop-loss Order

A stop-loss is intended to reduce an investor's loss on a position in the event of a negative movement.

With a stop-loss order, you direct your trading platform to sell your asset automatically when the price reaches or falls below a certain threshold. The stop-loss is activated on short bets when the price rises to a certain threshold.

 

 

How to Choose Your Order Type

Every order type is tailored to fit a particular trading situation.

Knowing which order type to choose increases your chances of limiting your losses and increasing your potentials.

Here are some tips on how to choose your order type.

Market Order

If you place a market order to buy a stock, it will be filled at the asking price set by the seller. If you're selling, it will be carried out at the price that the customer is willing to pay. 

The disadvantage is that while you have no control over the price, you can influence when the order is executed. With shares whose price fluctuates frequently, that might be challenging since you can wind up with a different price than when you placed your market order.

A market order is the right option for you:

  • If you are a long-term investor and your assumptions on fundamentals are solid
  • If executing a trade is the most import to you
  • Trading a highly liquid stock and spreads are small
  • Trading relatively few shares on a larger stock where you are less likely to move the price due to its large trading volume

 

Limit order

The price you will get when the order is completed is guaranteed by a limit order. But there is no assurance that the order will be executed fully or at all - especially if you chose to trade in unpopular, small-cap stocks. After market orders have been filled, they are put in the order received.

Additionally, keep in mind that if they cannot be filled in a single trading day, transaction expenses may be spread out over multiple days, costing more in commissions than market orders.

With an "all or none order," you can modify your limit order such that it is only executed when all the shares you want to trade are offered for sale at the price limit.

The limit order option is for you:

  • If you are a trader looking for short-term trends and are much more focused on the market price.
  • If you are buying a not very highly traded stock, whose price can jump around, it is useful to minimize your costs.
  • If you are trading a large number of shares, in which case a slight price change can mean a lot of money.

 

 

Final Thoughts on Order Types

Market orders are a sensible place to start when you first begin trading and investing.

They:

  • Are easy to comprehend
  • Are available from all brokers
  • Ensure that your transaction will be performed

But you'll quickly see that relying only on market orders is inadequate. The secret is to choose the optimal order type for your circumstance and to match your order type to your trading approach. 

Market, limit, stop, stop-limit, market-to-limit, and trail orders are undoubtedly terms that all traders and investors should be familiar with. This will enable you to carry out your trading plans more skillfully and lessen the necessity for constant market monitoring.

Check which order types each broker supports and what costs they charge for complicated order types before choosing a broker. This is a crucial way that brokers differ from one another and will ultimately affect how you trade.

Photo by Artem Podrez

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