What Are Stock Order Types and How to Use Them

What Is a Stock Order?

A stock order is an instruction you give to your broker to buy or sell a stock. But not all orders are the same.

Different order types allow you to control the price, timing, and execution of your trades.

The Four Main Types of Stock Orders

There are four primary types of stock orders that traders use:

1. Market Order

2. Limit Order

3. Stop Order

4. Advanced Stock Order Types

Each has its advantages and risks, so choosing the right one depends on your trading goals and strategy.

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

A market order is the most straightforward to buy or sell a stock, among all the stock order types. It executes immediately at the best available price in the market.

This type of order ensures that the trade happens as soon as possible, without specifying the price.

Because market orders prioritize speed over price control, they are ideal when you need to enter or exit a position quickly.

However, this speed comes with a trade-off: you may end up paying a slightly higher price when buying or selling for a slightly lower price than expected due to slippage.

What Is Slippage and How Does It Affect Market Orders?

Slippage occurs when there is insufficient volume at the expected price, causing the order to be executed at a less favorable price.

Market orders are executed at the current Bid (sell) or Ask (buy) price, ensuring quick execution but with the risk of slippage.

As illustrated in the above figure,

• A market buy order will execute at the Ask price, but if there isn't enough supply, it will continue to move up until it is fully filled.

• A market sell order will execute at the Bid price, but if there isn’t enough demand, it will continue to move down until it is completed.

This price movement beyond your expected level is known as slippage and can impact your profitability, particularly in volatile markets or with large orders.

When Should You Use Your Market Orders?

A market order stands out among other stock order types. It is best suited for the following scenarios:

1. Executing trades quickly when immediate order fulfillment is crucial

2. Trading in highly liquid markets with tight bid-ask spreads to reduce price impact

3. Placing orders in high-volume stocks or assets to minimize slippage

4. Reacting swiftly to fast-moving markets, such as during news events or earnings reports.

5. Ensuring instant execution at the best available market price.

Benefits and Risks of the Stock Market Order Types

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

What Is A Limit Order and How Does It Work?

A limit order is an instruction to buy or sell a stock at a specific price or better. Unlike other stock order types, 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.

How a Limit Order Works

A limit order can either be to buy or sell.

During a buy limit order, an order to buy a stock at or below a specified price. It executes only if the market price reaches the limit price or lower.

For example, if a trader places a buy limit order at $2,000, the order will execute only when the stock's price drops to $2,000 or below.

During a sell limit order, an order to sell a stock at or above a specified price. It ensures that the stock is sold only at the desired price or higher.

For example, if a trader sets a sell limit order at $2,000, the order will only execute when the stock's price reaches $2,000 or higher.

Key Features of a Limit Order

Below are the key features of a limit stock order:

• Price Control: Ensures the order executes at the specified price or better.

• No Immediate Execution Guarantee: The order remains open until the price condition is met.

• Useful for Volatile Markets: Helps traders take advantage of price fluctuations without constant monitoring.

• Better for Low-Liquidity Stocks: Reduces the risk of slippage in thinly traded markets.

Benefits and Risks of a Stock Limit Order

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

What Is A Stop Order, and How Is It Used?

A stop order is a stock order type 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.

What Are the Different Stop Stock Order Types?

Once the stop order type is triggered, it converts into a market order, a limit order, or a trailing stop order, depending on the type selected.

Stop Market Order

A stop market order turns into a market order when the stop price is reached, ensuring that the order is executed at the next available price.

This type of order is useful for traders who want to automatically exit a trade to limit losses or secure profits without constant market monitoring.

Stop-Limit Order

A stop-limit order becomes a limit order once the stop price is reached, ensuring that the order is executed only at the specified limit price or better.

This allows traders to have more control over execution price, but it carries the risk of non-execution if the price moves beyond the limit level.

Trailing Stop Order

A trailing stop order automatically adjusts the stop price as the market price moves in a favorable direction, allowing traders to lock in profits while still participating in potential gains.

Unlike fixed stop orders, a trailing stop follows the price movement at a set percentage or dollar amount.

Benefits and Risks of Stop Stock Order Types

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

Advanced Stock Order Types for Traders

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.

What Are Price Gaps?

A price gap occurs when an asset’s price jumps from one level to another without any trading in between.

This typically happens due to overnight news, earnings reports, economic data releases, or major geopolitical events.

Price gaps can be upward (gap up) when the opening price is higher than the previous close or downward (gap down) when the opening price is lower.

These gaps can impact order execution, especially for stop orders and limit orders.

Stop Orders And Price Gaps

Stop orders are particularly vulnerable to price gaps because they activate only when the stop price is reached, converting into a market or limit order.

However, if a stop market order is triggered during a price gap, it may execute at a much worse price than expected due to slippage.

For example, a trader sets a stop market order at $50, but the stock gaps down and opens at $45. The order executes at $45, not $50, leading to a greater-than-expected loss.

Limit Orders And Price Gaps

Limit orders provide more price control during price gaps, but they do not guarantee execution if the market moves past the specified price.

For example, a trader sets a buy limit order at $100, expecting the price to drop before executing. However, if the stock gaps up to $110, the order remains unfilled because the price never reaches $100.

How to Choose the Right Order Type for Your Strategy

Choosing the right order type depends on your trading goals, risk tolerance, and market conditions.

If you’re looking for fast execution opt for market orders, while those prioritizing price control should use limit orders.

If risk management is the primary concern, stop-loss or stop-limit orders can help minimize losses.

Moreover, if you’re an active trader, you may benefit from trailing stops to lock in profits while allowing for market fluctuations. Ultimately, the best order type depends on whether you prioritize speed, price precision, or risk protection in your trading strategy.

What’s the Best Stock Order Type for Beginners

For beginners, among all other stock order types, limit orders are often the safest choice as they provide control over execution price and prevent unexpected slippage.

Market orders can be useful for highly liquid stocks, but they may lead to poor fills in volatile markets. Stop-loss orders can help manage risk by automatically selling stocks at a predetermined level, but beginners should be aware of price gaps that may lead to slippage.

A simple approach is to start with limit orders for entry and stop-loss orders for risk management.

Common Mistakes to Avoid with Stock Order Types

There are multiple stock order types you can use in trading, but you must avoid the below mistakes:

• Placing market orders in volatile stocks: Can lead to slippage and poor execution.

• Setting stop orders too tight: Increases the risk of premature execution.

• Using limit orders too far from the market: May result in missed trading opportunities.

• Ignoring price gaps: Can cause unexpected stop order executions.

• Failing to adjust for market conditions: Leads to unfavorable trade outcomes.

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.