4 Stock Order Types: Market Order, Limit Order, Stop Order

What Is a Stock Order?

A stock order is an instruction you give to a broker to buy or sell stocks under specific conditions. The broker's job is to execute this order according to the type and parameters you set.

Depending on the type of order, it may be executed immediately, at a certain price, or only under certain market conditions.

How to Place a Stock Order

To execute a trade, you must know how to place a stock order correctly.

Here’s a simple step-by-step process:

1. Choose a Broker: Select a broker or online trading platform that suits your needs and offers access to different stock order types.

2. Decide on Your Order Type: Determine which stock order type best fits your trading goals, whether it’s a market order, limit order, or another type.

3. Input the Order Details: Enter the stock ticker symbol, the number of shares, the type of order, and any other specifications, such as price limits or expiration dates.

4. Review and Confirm: Double-check your order details to ensure accuracy before submitting it.

Keep an eye on the market and monitor the status of your order to ensure it executes as intended.

Types of Stock Orders 

There are several types of stock orders that you can use to buy or sell stocks, each designed to meet different trading needs:

1. Market Orders: Used to buy or sell a stock immediately at the current best available price.

2. Limit Orders: Allows you to set a specific price at which you want to buy or sell a stock.

3. Stop Orders: Triggers a buy or sell action when a stock reaches a certain price.

4. Advanced Stock Order Types: More complex orders like Good Till Canceled (GTC), Immediate-or-Cancel (IOC), and Fill-or-Kill (FOK).

Let’s explore each of these stock order types in detail.

What Is a Market Order and How Do I Use It?

A market order is the simplest type of stock order you can place.

When you issue a market order, you instruct your broker to buy or sell a stock immediately at the best available price.

Unlike other order types, a market order does not set a specific price. A market order just ensures that the trade happens as quickly as possible, regardless of the exact price at the execution time.

This is why market orders are particularly favored by traders who prioritize speed over price precision.

How to Use a Market Order

To place a market order, you simply specify the stock you wish to buy or sell and the number of shares.

The broker then executes the order at the current market price, which is the best available price at that moment. If there are enough buyers and sellers in the market, the order will be filled almost directly.

However, the price at which the order is executed may differ from that on your screen, especially in fast-moving markets.

Example of a Market Order

Imagine you want to buy 100 shares of Company XYZ. The last traded price of the stock is $10, and you decide to place a market order.

Your broker receives the instruction and executes the trade immediately. If there are enough sellers, your order will be filled as close to the $10 price as possible.

However, if there is a sudden surge in buying demand, the price might rise before your order is filled, and you could end up paying $10.10, $10.20, or even more.

On the other hand, if the market is rapidly falling, you might pay less than $10. 

Benefits and Risks of a Stock Market Order

Like other stock order types, a market order has its benefits and risks.

Benefits of a Market Order

• Immediate Execution: Ensures the trade is filled almost instantly at the best available price.

• Simplicity: Easy to understand and execute, making it ideal for beginners.

• Certainty of Execution: Provides a high probability that the order will be completed.

Risks of a Market Order

• Price Uncertainty: The final price may differ from the expected due to rapid market fluctuations.

• Potential Slippage: The execution price can be worse than the last quoted price in volatile markets.

• Market Impact: Large orders may affect the stock price, leading to less favorable execution.

What Is A Limit Order, and How Do I Use It?

A limit order is an instruction to buy or sell a stock at a specific price or better. Unlike a market order, a limit order gives you control over the price at which your order is executed.

However, there is no guarantee that the order will be filled, as it will only be executed if the stock reaches your specified price.

Limit orders are ideal for traders who are price-sensitive and willing to wait for the market to meet their conditions.

How to Use a Limit Order

To place a limit order, you specify the stock, the number of shares, and the desired price.

For example, if you want to buy shares, you set the maximum price you are willing to pay. Likewise, if you want to sell, you set the minimum price you are willing to accept.

Your order will be filled only if the stock reaches your set price or better.

Example of a Limit Order

Suppose you are interested in buying 100 shares of Company XYZ, but you believe the current market price of $55 is too high.

You set a buy limit order at $50, indicating you are only willing to purchase the stock if its price falls to $50 or less.

Your broker will wait until the stock’s price reaches $50 or below to execute the order. If the price does not reach $50, the order will not be executed.

Benefits and Risks of a Stock Limit Order

While a stock limit order might seem very beneficial, it also has some risks.

Benefits of a Limit Order

• Price Control: Allows you to set the maximum or minimum price for buying or selling.

• Prevents Overpayment: Protects against buying at too high or selling at too low a price in volatile markets.

• Flexibility: Suitable for various strategies, including entry and exit points at specific price levels.

Risks of a Limit Order

• Execution Uncertainty: No guarantee the order will be filled if the market price never reaches the limit.

• Partial Fills: Orders might only be partially completed if there aren't enough shares at the specified price.

• Time Sensitivity: Limit orders may expire if not executed within a certain time frame (e.g., day orders).

What is a Stop Order, and How Do I Use It?

A stop order is a type of stock order that becomes active once the stock reaches a specific price, known as the stop price.

This order type is primarily used to manage risk by limiting potential losses or securing profits.

When the stop price is reached, the stop order becomes a market order, meaning it will be executed at the best available price.

There are different stop loss stock order types which we’ll explore in detail below.

1. Sell Stop Order

A sell-stop order is placed below the current market price and becomes active if the stock’s price falls to or below the stop price.

This order type is typically used to minimize losses on a long position.

For example, if you purchased a stock at $50 and want to limit your loss to $5 per share, you might place a sell-stop order at $45.

If the stock's price drops to $45 or below, the sell-stop order becomes a market order and executes at the next available price, helping you prevent further losses.

Benefits of a Sell Stop Order

• Limits Downside Risk: Automatically sells your stock if it drops to a certain price, preventing larger losses.

• No Need for Constant Monitoring: Allows you to set a predetermined exit strategy, freeing you from watching the market continuously.

• Helps Protect Profits: Can also be used to protect gains by placing a stop price above your purchase price once the stock has moved in your favor.

Risks of a Sell Stop Order

• Price Slippage: In a rapidly falling market, the execution price may be significantly lower than the stop price.

• Unfavorable Market Conditions: A temporary dip in price could trigger the order, causing you to sell at a loss even if the stock price later recovers.

• No Execution Control: Once the stop price is hit, the order becomes a market order and executes at the next available price, which could be less favorable.

2. Buy Stop Order

A buy stop order is placed above the current market price and is triggered if the price rises to or above the stop price.

This order type is often used to take advantage of upward momentum in a stock's price or to limit potential losses on a short position.

For example, if a stock is currently trading at $30 and you want to buy it only if it shows strength by reaching $35, you would place a buy stop order at $35.

If the stock price reaches $35 or higher, the order is activated, and you buy the stock at the next available price.

Benefits of a Buy Stop Order

• Captures Market Momentum: Allows you to buy a stock when it’s showing upward momentum, increasing the chances of profiting from a rising market.

• Controls Short Position Risks: Helps limit losses on a short position by triggering a buy if the stock price starts to increase significantly.

• Flexible Strategy Tool: Can be used as part of a breakout strategy, where you aim to enter a position as soon as a stock breaches a resistance level.

Risks of a Buy Stop Order

• Price Volatility: In a volatile market, the execution price may be higher than the stop price due to rapid price changes.

• False Breakouts: A temporary increase in price could trigger the order, causing you to buy at a high price just before the stock declines.

• Lack of Price Control: Once triggered, the order becomes a market order, which may result in a less favorable execution price.

3. Stop Limit Order

A stop limit order is a hybrid between a stop order and a limit order, providing more control over the execution price.

When the stop price is reached, the order turns into a limit order instead of a market order.

This means the order will only be executed at a specified limit price or better, offering protection against price slippage but also carrying the risk that the order may not be filled.

For example, suppose you place a stop-limit order with a stop price of $50 and a limit price of $48. If the stock reaches $50, the order is triggered.

However, it will only execute if the price remains at $48 or better. This gives you the advantage of setting both a stop price to protect against losses and a limit price to ensure you don’t sell at an unfavorable price.

Benefits of a Stop Limit Order

• Price Control: Provides more control over the execution price compared to a regular stop order.

• Prevents Slippage: Ensures you do not sell or buy at a price far from your intended level due to rapid market movements.

• Combines Risk Management Tools: Offers the benefits of both stop orders and limit orders, allowing for flexible trading strategies.

Risks of a Stop Limit Order

• No Guarantee of Execution: The order may not be filled if the market price moves past the limit price too quickly.

• Partial Fills: Similar to a regular limit order, the stop limit order could be partially filled if only a portion of the shares is available at the limit price.

• Missed Opportunities: In a fast-moving market, your order may not execute at all, potentially missing out on a favorable price movement.

4. Trailing Stop-Loss Order

A trailing stop-loss order sets a stop price at a fixed percentage or dollar amount below the market price, which automatically adjusts as the stock price moves in your favor.

Unlike a regular stop order, which remains fixed, a trailing stop order “trails” the stock price as it rises, locking in gains while still allowing for upward movement.

For example, if you set a trailing stop order with a 5% trail on a stock currently trading at $100, the stop price is initially set at $95.

If the stock price rises to $110, the stop price automatically adjusts to $104.50 (5% below the new high).

If the stock then begins to drop and hits $104.50, the order is triggered and becomes a market order to sell.

Benefits of a Trailing Stop-Loss Order

• Protects Gains: Automatically adjusts to lock in profits as the stock price moves in your favor, without needing constant monitoring.

• Flexible Strategy: Suitable for volatile markets where you want to protect against downside risk while still participating in upward trends.

• No Emotion Trading: Helps prevent emotional decisions by automating exit points based on price movements.

Risks of a Trailing Stop-Loss Order

• Execution Uncertainty: The order could trigger during a temporary price dip, potentially causing you to sell at a lower price than intended.

• Price Gaps: In fast-moving markets, the stock could gap past the stop price, resulting in an execution price far different from what was anticipated.

• Over-Reliance on Automation: While automation reduces emotional trading, it may also lead to missed opportunities or unfavorable executions if not carefully set.

Advanced Stock Order Types

In addition to the basic market, limit, and stop orders, there are several advanced stock order types, that offer more control on your trading strategies.

• Batch Order: Combines multiple orders into a single batch to be executed at a specific time, typically used by institutional investors to reduce market impact.

• GTC Order (Good Till Canceled Order): An order that remains active until it is either executed or manually canceled by the trader, regardless of how long it takes.

• Immediate-or-Cancel Order (IOC Order): Requires that any portion of the order that can be filled immediately is executed, while any unfilled portion is canceled.

• All-or-None Order (AON Order): Executes only if the entire order can be filled at the specified price; otherwise, the order is not executed at all.

• Fill-or-Kill Order (FOK Order): Demands immediate execution of the entire order in full; if this is not possible, the order is canceled entirely.

Summary Table: Comparison of Stock Order Types

To help you quickly compare the different stock order types, here is a simplified table summarizing their key features, benefits, and risks.

Conclusion

Understanding the various stock order types is essential to navigate the stock market effectively. 

Whether you are looking to execute a trade immediately, at a specific price, or under certain conditions, there is an order type tailored to your needs. 

If you are looking for a reliable platform to execute these trades, join XS, as we offer you a seamless trading experience with premium conditions.