Types of Stock Orders

Once you’ve decided on the stock, mutual fund or exchange-traded fund (ETF) and the number of shares you wish to purchase or sell, you’re ready to place your order. There are many ways brokers let you do so. This video explains the primary types of stock market orders, including market orders, limit orders, stop orders and fill-or-kill orders.

Order types are the instructions you give to your broker for execution. Your selection determines your order’s precedence, likelihood of being filled and chance for hitting your ideal price.

When placing an order, you’ll have to decide between a day order or a good-til-canceled, or GTC, order. As the name implies, a day order only lasts for the current trading session. These orders are automatically canceled if they aren’t filled by market close. GTC orders typically stay open for 30 to 60 days, depending on the broker and your selection. These orders are useful for price-sensitive investors who have longer time horizons.

With day order or GTC determined, you can select your preferred execution type. The most common is a market order. It instructs a broker to buy or sell the given security immediately at the best price available. That means filling the ask on buy orders and bid on sell orders. Because there’s no price specified, these orders are almost always filled.

For example, placing a buy market order on a stock with a $28 bid and $28.10 ask means your order will be filled at $28.10. A market order to sell would fill at $28.

While market orders are the easiest to place and execute, during volatile periods or with thinly traded securities you may end up with a less advantageous price than you expected based on the prevailing quote. That’s because the market might move away from you in the time it takes to place the order—or your order might itself cause that market movement.

Investors looking to control the price paid or received for a security generally use limit orders. Here, investors specify a maximum price at which to buy a stock or a minimum price at which to sell it. Once the price reaches this limit, the order is filled at that price point (or better) if there is sufficient trading volume at that level. A buy limit order for $35 will not fill until the stock moves to or below $35. On low-volume stocks or a fast-moving market, your order may only partially be filled before trading moves away from your specified price.

The biggest risk with limit orders is that they go unfilled. For example, placing a limit order below a rising stock might leave you empty-handed as it continues to rise.

One trick to increase the likelihood of your order filling is to use “odd ball” limits. Most investors place their limit orders with digits ending in 0 or 5. Adding or subtracting one penny from that—$25.11 instead of $25.10—could give you priority over those clustered orders and thus increase the likelihood of a complete fill without sacrificing much in the way of price.

Stop orders help investors to manage risk. They are a direction to buy or sell a stock once it reaches a certain price, at which point the order, because it’s a market order, is immediately executed. These are regularly used to protect against losses or, in trailing stop orders, to preserve gains. You might place a stop order to sell at 10% to 20% below the current price if you hold a stock.

For example, if you hold a stock at $50, you may place a stop order at $40 to preserve your capital if the price starts tumbling on bad company news. This allows you to participate in upward swings while protecting you if the stock goes on a deep downward swing.

Importantly, sell stop orders must be placed below the current market price and buy stop orders above the current price. Limit orders, which sound similar to stop orders, are the opposite: Sell limit orders must be placed above the current market price and buy limit orders below it.

When using a stop order, remember that they become market orders when triggered. Returning to the earlier example, a stop order at $40 may not execute at that price if the market is moving quickly.

You can get around this by leveraging stop-limit orders. This type of stop order becomes a limit order when triggered, though that carries the limit order’s risk of partial or unfilled orders.

Lastly, and less commonly used, is the fill-or-kill order. These instruct a broker to buy or sell a set quantity at a specified price (or better) immediately. If this can’t be done, the order is automatically canceled. This is used when you want that quantity and price and will accept no substitute. It’s usually favored by active options and stock traders who want to profit from relatively small price movements.

Now that you know the difference between the various order types, you’re ready to invest! For more information on order types, selecting stocks and financial education, be sure to visit AAII.com and claim your $2 one-month, full access trial to our tools and articles!