Once you’ve made up your mind about a stock, the rest is easy, right? Just call up your broker and say “buy” or “sell.”

Unfortunately, it’s not always that simple. There are multiple ways to give buy and sell instructions to a broker, and just as many ways to get burned if you mess up.

Here is a rundown of the most common order types used by most stock exchanges and brokers. Some brokers, though—especially the online variety—may not accept every stock order type, so check ahead of making your transaction.

What Is a Stock Order and How Does It Work?

As mentioned above, a stock order gives instructions to your broker or brokerage account as to how you want to buy or sell a stock. You will input an order when you have decided to execute a trade within your portfolio.

If you plan to execute stock trades on your own, instead of using a financial adviser, then you’ll need to understand what an order is, how it works and what stock order types are available to you. If you plan on using a broker or financial adviser, it can be helpful to understand what a stock order is so you can communicate your needs more efficiently.

Depending on your investing style, different stock order types can be used to trade individual securities more effectively.

Stock Order Types

If you’re new to the investing world, you may be confused why there are different order types to choose from. The brokerages create and control these different stock order types to best serve the investor or financial adviser, depending on their unique needs. A variety of different stock order types provide investors with more options for how to buy and sell securities like stocks or funds.

Some brokerages will offer more stock order types than others; therefore, you may want to select your online brokerage based on your needs and preferences.

Day Order Versus Good-til-Canceled Order

Day orders are good for the current trading session only and are automatically canceled if not filled by day’s end. Good-til-canceled (GTC) orders remain in effect until canceled by the customer or executed by the broker. However, some brokers will cancel GTC orders after 30 to 60 days, so it’s always good to check in with your broker to make sure that a GTC order is still good.

If you’re having trouble discerning between day order and GTC order, no worries, we will simplify the terminology. If you placed an order the day prior, a day order will not be an active order the following day.

What Is a Market Order?

This is probably the most commonly used order. It instructs the broker to buy or sell “at the market,” or at the best price available, immediately. It’s nearly always filled since there is no price specified.

For example, if Computer Firm A is quoted at $28 bid and $28.10 offered, your market order to buy would be filled at $28.10 and your market order to sell would be filled at $28, if those prices are still good when your order is executed. However, if the quote changes after you enter your order but before it’s executed, you will receive the then-current bid or ask price.

Market orders are the easiest to enter and execute, but the disadvantage is that you may end up with a less advantageous price than you expected based on the quoted price.

What Is a Stock Limit Order?

A limit order is placed when an investor wants to restrict or “limit” the price received or paid for a security. This is done by specifying the minimum price at which a stock will be sold or the maximum price at which a stock will be bought. Once the price reaches the “limit,” the order is normally filled at that price (or better) if there is sufficient trading volume at that level. On thinly traded issues, you may receive a “partial fill,” meaning that only part of your order was filled at the limit price. The biggest risk to limit orders is that they go unfilled completely. For example, if Tech Company B is trading at $31 and you wish to buy shares at a $29 limit, you may regret this decision if Tech Company B trades down to $29.25 but then zooms upward, leaving your order unfilled. Or, it could trade down to $29 but only for a small number of shares; if your limit order is behind other limit orders at the same price, those orders must be filled before yours, and by that time the price may have headed back up. Of course, you can always change your limit but doing this too frequently will drive your broker crazy.

When using limit orders, I normally wait for the price to approach the limit I wish to pay and then put the order in. One trick worth considering is using “oddball” limits. Most investors place limits ending in the digits 0 or 5—for instance, buying at $25.10 or selling at $30.50. Consequently, limit orders tend to cluster around certain price points, making fills tougher since limit orders at the same price are filled by time priority.

I’ve found that adding a penny to buy limits (say to $25.11) or subtracting a penny from sell limits (say to $30.49) increases my chance of getting shares since my order is “ahead” of the rest. Limits can also be useful in trading in stocks with big spreads between the bid and offer. If the quote is $15 by $15.50, you might place your order in between at $15.25 to lower transaction costs. In my experience, such orders stand a good chance of being filled.

Limit orders are most easily used on listed securities (NYSE or Amex) where your limit order becomes part of the specialist’s book and remains there until filled or canceled.

For Nasdaq issues, you can instruct your broker to post your order on an ECN (electronic communications network), such as Archipelago or Island, where you can see it on a Level II quote screen. Once the market reaches your price, your order will normally be filled at that price. Note that exchange specialists must always execute all limit orders on their book at the limit price before trading for their own accounts at that price. However, Nasdaq market makers may trade ahead of your limit even if you placed your order first.

What Is a Stop-Market Order?

Stop orders, also known as stop-market orders, tell a broker to buy or sell once a stock reaches a certain price. Once this occurs, the order becomes a market order and is executed at the next available price. These orders are usually used to protect against losses or preserve gains. You might place a stop-market order to sell at 10% to 20% below the current price if you hold a stock.

For example, say you have a nice gain in Bank Stock A, which is trading around $50. To preserve that gain, you might consider a stop-market sell order at $40, which is 20% below the current price. If Bank Stock A continues to advance, you’ll participate, but if it declines by 20%, you’re out.

Although stop-market orders sound like limit orders, there’s a difference. Sell stop orders must be placed below the current price and buy stop orders above the current price. Conversely, sell limit orders must be placed above the current market price and buy limit orders below.

Remember, stop orders become market orders when triggered, meaning the price you obtain could be far from your stop price if the stock is moving rapidly. Stop-market orders guarantee execution, not price. Many investors discovered this the hard way in the crash of 1987, finding that stop orders were executed well below their stops.

What Is a Stop-Limit Order?

To protect against the above, you might want to consider stop-limit orders, which become limit orders when triggered. Unlike stop orders, which become market orders when triggered, stop-limit orders restrict the order to a specific price. A stop-limit order to buy becomes a limit order executable at the limit price or better when the security trades at or above the stop price.

A stop-limit sell order becomes a limit order executable at the limit price or better when the security trades at or below the stop price.

If that price is not met, the order goes unfilled. While stop-limit orders eliminate the possibility of a worse-than-expected price, if the market or stock is moving quickly, your order may go unfilled if the broker cannot execute your order fast enough once the price passes your limit. As a general recommendation, only use stop-limit sell orders if you are willing to hold the shares, even if you cannot get your desired price.

All-or-None Order Versus Fill-or-Kill Order

A fill-or-kill order instructs the broker to buy or sell at a specified quantity and at a specified price (or better) immediately. If this can’t be done, the order is automatically canceled or “killed” immediately.

This order type is typically used when you want a certain quantity and price and will accept no substitute. Fill-or-kill orders are favored by active options and stock traders who are looking to profit from relatively small price moves.

The all-or-none order is similar, except it is not canceled if it is not filled immediately upon presentation to the trading crowd. It could be a day order (good for that trading day only) or GTC (good-til-canceled) order.

What Is a Market-Not-Held Order?

Market-not-held orders are like market orders without immediacy. Not-held orders allow the floor broker more time and discretion in buying or selling if they think they can get a better price by waiting. Normally, these are given with a “top” or “bottom” price not to be exceeded. Additionally, not-held orders are also known as “disregard the tape” and are always done at the customer’s risk. Since they require the use of a floor broker to “work” your order, they normally aren’t available through online brokers.

Normally, I will use a not-held order type for thinly traded listed issues where I’m willing to pay the market price but don’t want the specialist exploiting the order, as would happen with a regular market order.

Can You Buy and Sell Stock in the Same Day?

Now that we’ve delved into the different stock order types and what they mean, you may be wondering if you can place a buy and sell order on one security in the same day. The purchase and sale of securities within one business day is typically considered “day trading” and is used by those who aim to make a profit off quick trades; however, some investors may just be trying to get in at the right price before they let it accrue for weeks, months or even years.

The short answer is, yes, you can buy and sell a stock in the same day as long as it’s during stock market hours. That means you can also make multiple buy orders as well as sell orders during the day. You will want to know the basics of when to sell a stock and how to create your own clear buy/sell rules before selling securities.

How Do I Choose Which Stock Order Types to Use?

Knowing the differences between the various stock order types is key to being a well-informed individual investor. There are times where you may want to use different stock order types depending on your investment approach and overall strategy.

If you consider yourself a long-term investor, you may focus on market orders because they are cheaper and the overall investment decision is based on fundamentals over a longer period of time rather than in the short term. If the stock’s current market price is not a priority issue for you, a market order may be the best fit. However, a short-term investor or day trader may be more conscious of the current market price; in which case, a limit buy order with a stop-loss order to sell is usually the bare minimum for setting up a trade.

By knowing what each stock order type does and how each one might affect how you invest your hard-earned money, you can identify which sell or buy order will fit your individual investing needs and goals.

The Bottom Line: Using Stock Order Types to Invest

As mentioned above, the key to selecting the right stock order types to use for various instances and situations may change based on your individual trading strategy. All investors should be aware and well-versed in understanding the basics of each stock order type: market order, limit order, stop order, stop-limit order, not-held order, fill-or-kill order, etc. As an individual investor, this knowledge will empower you to execute your strategies more effectively and reduce your need to watch the market moment by moment, which can inherently lower your psychological risk tolerance.

Additional Resources for Stock Orders

As you deliberate on which stock order types are right for you, you may want to check out helpful resources to improve your investment strategy. AAII’s A+ Investor subscription offers individual investors countless stock screening tools and resources to find the right securities for your portfolio.

At AAII, we want to make sure you have the right information and resources to make well-informed decisions about your investments. We’ve compiled a quick list of additional resources to use to better understand stock order types to use during the purchase or sale of securities:

• Types of Stock Orders
• Beginner’s Guide to Stock Investing
• AAII Stock Ideas
• Dividend Stock Investing

This article was originally published in the April 2004 AAII Journal. Click here for a PDF of the original article.