Buying or selling shares isn’t always quite as simple as going to a store, taking goods off the shelf, and paying for them at the cashier. Stock investors have the option of using different types of orders, depending on their goals and priorities. They may use a broker, or increasingly they can do it themselves online.
Three main types of trade orders are available: market order, limit order, and stop order.
A market order is a lot like going to a store and paying retail price: Investors instruct to buy or sell now at the going price. Most big company stocks and exchange-traded funds can be traded this way, almost instantly during market hours, and with little difference in price from what investors expected. Because of this, market orders are commonly used by small investors.
Here’s a real-world example of a market order: Investors want to buy 50 shares of Oracle Corp., the big provider of corporate database software. They call their broker with a market order at 2 p.m., when US markets are open and Oracle’s stock price is $86, lower than the $87 closing price a day earlier. The broker is able to execute the trade in a few minutes, at a price of $86.25.
Market orders typically focus on the following:
- Quick completion of the trade. This is true as long as the stock is actively traded and market conditions are normal.
- Pricing. Transaction prices are ideally close to the last market price seen by investors.
Market orders do have some risks:
- Prices may vary. There is no guarantee, since there may be some change from the time an order is placed to the time the trade is made. For large-cap stocks and ETFs, the price change is very small, typically no more than a few cents from the last price quote seen by investors. On days when markets are volatile, the difference between the investors’ last-seen price quote and the actual trade price can be greater.
- No guarantee of fulfilment. The market order may not be executed, since it depends on the availability of shares at a given moment and counterparties (sellers for those buying and vice-versa). Large orders might face this problem—for example, an order to buy 1,000 shares of DEF Corp. depends on finding someone ready to sell 1,000. This generally isn’t a problem with large-cap stocks and ETFs—there are plenty of shares available at any moment, and plenty of buyers and sellers.
- Market disruptions. Market orders may be held up if trading in a stock is temporarily halted by an exchange, often because of a pending announcement by the company or an imbalance in buy and sell orders. Also, trading may be suspended by securities regulators if they are concerned about the company’s financial condition and operations.
Market orders may be most successful if placed when exchanges are open, usually from 9:30 a.m. to 4 p.m. Eastern Time. News developments and announcements occurring outside of exchange hours can result in big changes in a stock’s price when the next trading day begins.
A modified market order, called a market-on-close order, instructs the broker to buy or sell just before the close of markets. This is based on the perception that late-day prices are more stable because traders have had all day to evaluate any new information about the company. After-market and premarket news can cause greater volatility in stock prices.
A limit order is just that—an order with a price limit. A buy limit order sets a price ceiling: Don’t pay above $XX a share. A sell limit order sets a price floor: Don’t sell for less than $XX.
Using the Oracle example above, assume investors want to buy soon after the market opens at 9:30 a.m. Eastern Time. They call the broker with a market order for 50 shares, but the broker warns that the price is climbing because Oracle announced strong quarterly earnings a day earlier, after the close of trading. At 9:35, Oracle is trading at $90. The investors decide to place a $92 limit order instead: Buy 50 shares, but don’t pay more than $92.
Limit orders typically focus on the following:
- Shielding investors from runaway prices. This may help investors avoid getting stuck with a too-high purchase price or a too-low sale price.
- A wait-and-see approach. Investors can maintain the order for a few months to wait for a beneficial trading opportunity.
Limit orders also have risks:
- The trade may not happen. This may occur if the limit price wasn’t reached. For buyers, the price didn’t fall to the buy limit; for sellers, the price didn’t rise to the sell limit. Also, the limit may be briefly reached, and then move back beyond the limit before a trade can be executed.
- Not enough shares available. This can be true even if the limit price is reached.
- External factors. The price limit may get overtaken by events.
A stop order might be more appropriately called a trigger order, because when the stock reaches or passes a designated price, this triggers a market order. It can be a sell stop order or a buy stop order.
In the sell stop case, let’s assume investors bought Company A shares at $30. They now trade at $45, so they might place a sell stop order to try to preserve a gain. For example, they might set the stop price at $43; if Company A retreats to $43, their order would be activated.
In a buy stop order, investors hope to anticipate a rising price trend by placing an order above the current price, but near the start of the expected trend. Let’s say Company B has been trading between $68 and $72 a share for several months. Investors think it’s poised for a steady increase above this trading range. They place a buy stop order at $74, because they want to see if Company B stock rises and stays above $72 before they buy.
In a variation called a trailing stop order, the stop price adjusts dynamically to the market price, to maintain a certain margin above or below the market price. For example, a trailing stop could be set for 10% lower than the current price. This allows investors to keep a stop order for an extended period of time, instead of having to place different orders over the time period. Investors owning shares may use a sell stop order to preserve gains after a period of rising prices; short sellers may use a buy stop order to preserve gains from betting against rising prices.
Other variations of basic market or limit orders
Here are some other basic market or limit orders used by investors.
Stop loss order
This can be either a sell stop or buy stop order, either to protect some gains or to avoid or control losses. Investors could use a sell stop order as a buffer against a falling stock price; other investors who shorted the shares might use a buy stop order to buffer against a rising price.
Stop loss orders can be useful for investors who may not have time to constantly watch market prices and will let the stop price trigger trading decisions. For example, investors in Company A bought the shares at $30, they now trade at $45, and the investors place a sell stop at $43 before they travel for a month.
This combines a stop and a limit. A stop order tells the broker to wait until the stock price reaches $XX before buying or selling. A limit order tells the broker not to go beyond a certain price. For example, don’t pay more than $XX a share when buying, or don’t accept less than $XX in selling. Each order type provides investors some degree of control over price in trading; together they add more control.
For example, investors own 10 shares of Tesla. They bought them a year ago at about $450 a share, and now the shares are trading at about $750. To protect the gain, investors want to use a stop order to sell if the price falls back to $700, but they know that Tesla’s stock price can be volatile and fall quickly through the $700 trigger. So they add a $675 limit to the stop order. The broker can start selling once the price drops to $700, but not sell for less than $675.
All-or-none orders (AON) mean investors want an order filled entirely, or not at all. Example: Investors place an order to buy 1,000 shares of TinyCap Inc., but only 500 shares are available from sellers, so the order stands until 1,000 shares are available. This approach is used often for low-price stocks that are not listed on exchanges, called penny stocks.
Immediate or cancel
With these orders, investors want the trade done very quickly, sometimes within seconds, or to cancel the order. Investors can even accept a partial fill of their order, as long as it’s done quickly.
Fill-or-kill orders are a combination of all-or-none and immediate or cancel conditions. It means investors want their entire buy order for 1,000 TinyCap shares filled very quickly, or canceled.
Good ‘till canceled
With these orders, investors can indicate how long they want the order to stay in effect, to a maximum of 90 days for most brokerages. If investors don’t indicate a particular expiration date, the order will default to one day and expire at the end of the trading session.
This is a type of limit order, in which a specific price is set to sell shares, to capture some price gain. If the stock doesn't reach the specified price, the order won’t be filled. Take profit is often used along with stop loss orders by traders focused on quick price moves. Long-term investors generally avoid this type of order.
Market orders usually can be done online, once an investor has set up a brokerage account. Some limit orders also can be done online. Other variations of basic market or limit orders may require the assistance of a broker, online or by phone.
The bottom line
Market orders generally are preferred by long-term investors who are looking at the fundamental characteristics of companies in buying and selling stocks, and will hold stocks for months and years. Trading price is of less concern to them.
Limit orders are favored by traders who focus more on short-term price trends in stocks, and who buy and sell frequently.
Stop orders can be used by investors to lock in profits from a bullish trend in stock prices (sell stop orders) or to anticipate a bullish trend (buy stop orders). And traders will often use stop orders to capture gains or limit losses from short-term price swings, including intraday swings.