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 go over all the possibilities with a few examples for better understanding. Everything will be broken down for everyone to understand clearly.
Table of Contents
Stock Order Types: Market Order
Our stock order types start with market orders. A market order is the most basic order for any investor. An order is sent to a broker and will be executed.
If the security is actively traded, the order will most likely be executed within seconds. The goal for a market order is to be executed ASAP.
However, the price is not guaranteed. It can be executed at a lower or a higher price. This can happen with stocks that aren’t traded as frequently, with low volume. Stocks with larger spreads are a good example of when to avoid a market order.
Furthermore, market orders should absolutely be avoided when the market is closed. The price of the stock can greatly change between market close and opening the next day. A market order will be fulfilled as long as there are enough funds to cover even if the stock price jumped tenfold since placing the order overnight.
Quick and easy example. You want stock A and it costs $1 per share to buy it. It’s frequently traded and there is a ton of daily average volume. A market order is placed for 1,000 shares.
A few seconds later, the order is fulfilled and BAM, you are the proud owner of 1,000 shares of stock A and it 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.
Stock Order Types: Limit Order
This section will have a distinction 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.
With a buy limit order, investors have much more power over their purchases. They set the maximum price they are willing to pay for a security. This is useful when we think the security is overvalued and there will be downward price movement. It is also possible to specify for how long the limit order will be in effect.
They can last for a day or a few months, depending on your broker. If a limit order isn’t fulfilled by the specified end of the day, it will be canceled. The order can also be fulfilled at a lower price.
Certain limitations do exist though. As we established, the order may never fill 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 priced at $11. Two weeks later, the order is fulfilled at $9,90. The investor saved 10 cents per share since 1,000 shares were available at a lower price.
The same theory applies to a limit sell order. However, it becomes the minimum price to sell the security. This is a good strategy if we believe the price will have upward momentum. The order can also be executed at a higher price than expected.
Example: A sell limit order is set for $15 for 2 months. The current price is $10. The investor expects the price to jump by at least 50% in the next 2 months. Unfortunately, the price never reaches $15 and the order doesn’t get fulfilled. It is possible to set another sell limit order.
Buy Stop Order
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. Once the price is reached, it becomes a market order and it can be fulfilled at a higher price.
The price can drastically change between market close and open. 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 for $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 is fulfilled 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 dollars per share.
Sell Stop Order
A sell stop order is set when the desired price to sell 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, there is a market crash and the stock quickly falls below $90. Since it is a market order, there is always the possibility that the order is executed at a lower price than anticipated. In this case, the order is fulfilled at $88.
Stock Order Types: Stop-Limit Order
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.
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 that is 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 it’s important to know what the different stock order types do.
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. If the stock drops more than expected, the sale of the stock won’t be triggered.
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 types of orders. Below, we will briefly explore additional order types that only a few brokers allow on their platforms.
Stock Order Types: 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 price can greatly vary among platforms.
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 is fulfilled for 5,000 shares for $10. That was the number of shares available at that time for that price. The rest of the order is canceled.
Fill or Kill (FOK)
A FOK order combines AON with IOC. The exact amount of shares at the specified price must be filled within seconds or else the order is cancelled.
I hope this was a good refresher for anyone still unsure about the different order types brokers offer. As I said, it is important to understand and apply them accordingly.
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