Stock Order Types

Stock Order Types Explained

8 min read

Today’s topic of stock order types should be a refresher for most investors. It can also be an important topic for those in the early stages of investment. Knowing and executing various stock order types are the ABCs of investing. We will review all the possibilities with a few examples for better understanding. We break everything down so you can understand clearly. 

Our stock order types start with market orders. A market order is the most basic order for any investor. An order will be sent to a broker and executed.

The broker will likely execute the order within seconds if it’s an actively traded security. The goal for a market order is to fill ASAP. 

However, the price is not guaranteed. The broker can fill the order at a lower or a higher price. A bad order fill can happen with stocks that aren’t traded as frequently and have low volume. Stocks with larger spreads are a good example of when to avoid a market order.

Market Order Example

1. Market Order

Avoid market orders when the market is closed. The stock price can greatly change between market close and opening the next day. Your broker will fill a market order if enough funds cover it, even if the stock price has jumped tenfold since placing the order overnight.

Quick and easy example. You want stock A, which costs $1 per share. It’s frequently traded, and there is a ton of daily average volume. A market order is 1,000 shares.

A few seconds later, the order is filled, and BAM, you are the proud owner of 1,000 shares of stock A, which cost …. $1,010. Why $1,010 instead of $1,000? While you were entering the details of your transaction, the price to buy increased to $1.01. 

2. Limit Orders

This section will distinguish between a buying and a selling order. With stock order types, the limit vs market order is a widely debated topic. Which one is better? That depends on your trading style. But we’re breaking down each order type so you know which one you’ll like the best.

Limit Order vs Market Order Example

Buy

Investors have much more power over their purchases with a buy-limit order. They set the maximum price they are willing to pay for a security. A buy limit order is useful when we think there will be an overvalued security and a downward price movement. It is also possible to specify how long the limit order will be in effect.

Depending on your broker, they last a day or a few months. They will cancel if a limit order can’t be filled by the specified day’s end. Did you know your broker can fill your order at a lower price?

Certain limitations do exist, though. As we established, the order may never be filled since the price doesn’t drop to that amount. There also might not be enough shares available for the desired price limit. 

Example: An investor sets a buy limit order for 1,000 shares of stock B for 30 days at $10. The stock is currently at $11. Two weeks later, you fill the order at $9,90. The investor saved 10 cents per share since 1,000 shares were available at a lower price.

Sell

The same theory applies to a limited sell order. However, it becomes the minimum price for selling the security. If we believe the price will increase, this is a good strategy. Therefore, the order is executing at a higher price than expected.

ExampleA sell limit order is $15 for two months. The current price is $10. The investor expects the price to jump by at least 50% in the next two months. Unfortunately, the price never reaches $15, and the order isn’t. It is possible to set another sell limit order.

Buy Stop Order - Stock Order Types

Once again, this section will differentiate between a buy and a sell order for stop orders.

A buy-stop order is effective when an investor wants to purchase a stock above the current market price. It becomes a market order and can be fulfilled at a higher price once the price reaches its goal.

The price can drastically change between the closed and open markets. Our example will focus on this specific case for stock order types.

Example: An investor sets a buy-stop order for a stock valid for 30 days. The current price is $10, and the order is $12. During after-hours in 1 week, there is news that the company might get acquired by a rival. The following day, the stock jumps to $20. That morning, the order fills at $20 per share.

In this example of stock order types, the investor might be happy with the result as the stock might keep climbing. However, it is important to monitor the news as not every investor would be comfortable spending $8 more per share.

Sell Stop Order

A sell-stop order is set when the desired selling price is below the current market price. The price can also fall drastically after overnight news, and the order will be fulfilled once the market opens.

Example: An investor owns a stock currently trading at $100. A sell-stop order is set at $90 and is valid for 30 days. The next day, the market crashed, and the stock quickly fell below $90. Since it is a market order, it can always be executed at a lower price than anticipated. In this case, the order is fulfilled at $88.

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Stop-Limit Orders - Stock Order Types

Let’s take a look at stop-limit orders. This is another to add to the list of stock order types. So, another section, another distinction between a buy and a sell order.

1. Buy Stop-Limit Order

The goal of a buy-stop-limit order is to set upper buying boundaries to avoid overpaying for a stock, like in the example above for a buy-stop order. 

Example: You want to buy a stock currently trading for $30. You set a buy-stop-limit order with a stop price of $32 and a limit of $33. In this case, you avoid overpaying if the stock price jumps above $33 during after-hours trading. This is why knowing what the different stock order types do is important.

2. Sell Stop-Limit Order

Once again, a selling limit is set to avoid selling stock too low. Example: You own a stock with a current market price of $30.

You set a sell stop-limit order with a stop price of $25 and a limit of $24. The sale won’t be triggered if the stock drops more than expected.

This concludes the section on the most commonly used security orders. All the examples above were used with stocks. However, this also applies to options, ETFs, etc.

It is important to note that some brokers will charge extra for different orders. Below, we will briefly explore additional order types only a few brokers allow on their platforms.

All or None (AON)

All or none orders ensure that the entire quantity desired is fulfilled at the determined price. Otherwise, the order will not be performed. This can be game-changing for penny stocks as their prices vary greatly among platforms. 

1. Immediate or Cancel (IOC)

An IOC order states that the number of shares available at the time of the order will be executed. Usually, this is good for a few seconds once the order is submitted.

Example: An IOC order for 10,000 shares of stock A at $10 is issued. A few seconds later, the order for 5,000 shares for $10 is fulfilled. That was the number of shares available at that time for that price. The rest of the order is canceled. 

2. Fill or Kill (FOK)

An FOK order combines AON with IOC. The number of shares at the specified price must be filled out within seconds, or the order will be cancelled. 

Final Thoughts: Stock Order Types

I hope this was a good refresher for anyone unsure about the different order types brokers offer. As I said, it is important to understand and apply them accordingly. 

If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.

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