Stock Order Types Explained - Basics You Need to Know

stock order types

When trading stocks and shares, there are many different stipulations you can make in terms of how the stock is traded in order to maximise profits and minimise losses.

These stipulations can involve specifying the timing, price and size of the trade you want to make, so they don’t trade at too low or too high a price for example.

There are many stock order types that affect how a trade is made and we’ve outlined the basics for you below. It’s worth remembering however that these can vary between exchanges.


Market order

If you are buying or selling shares on a certain platform, when you make a market order, you are essentially just requesting the transaction to go through at the next available price.

This tends to stay in place for a day and then prompts the buying or selling of the shares provided they are still actively traded.

While this can be a useful stock order type to use, you need to be careful because the price of stocks and shares can vary greatly over time.

When you request the purchase or sale of a certain security at some point in the future with a market order, you could lose or potentially gain money from the transaction depending on how much the stock’s value has changed.

Such volatility in the price of stocks is especially true during times of heavy trading or economic volatility, so it’s always worth being extra careful when using a market order.

Sometimes it may be better for you to issue a limit order, especially if you have limited funds to pay for a transaction - otherwise a platform may reclaim funds from your account if you fall short.


Limit order

order types

Limit orders are a similar stock order type to a market order but they limit the price at which the stock is bought or sold.

Similarly you can place a limit order so that it will sell below or at a set price, when selling the stock.

In both instances this prevents you:

  • paying too much for a stock
  • getting too little for it

The main downside of a limit order is that the trade may not go through if the price never gets to the limit you have set. You therefore need to keep on top of your limit orders to ensure it does get bought or sold.

There are also limitations on limit orders including that on buy or sell limit orders, the limit can’t usually be more than 30% above or below the price of the last trade and some platforms will cancel trades that are 30% above or below the last trade.

Furthermore you can make a day order where you can limit orders for the day on which they are made or for an open-ended time frame when the order is executed or when you cancel. You can only use limit orders on the day for short sales and the order is also cancelled if the limit you choose isn’t reached within the day.

Another thing you should consider is whether open limit orders expire. All open limit orders usually expire after 120 days after you place them, or on the first business day if the expiration day falls on a weekend or holiday.

You should also think about when or how a limit order is filled - for limit orders of more than 100 shares or multiples of 100, they may be filled in whole or in part until completed. Although this can vary depending on whether an order is denoted as all or none, immediate or cancel or kill or fill.

Finally it’s important to bear in mind that just because you put a limit or stop order on a trade, it doesn’t mean it is guaranteed to be executed.

Due to the various rules on different trading platforms, usually orders at each price level are priced in a sequence. As such there is no guarantee that all orders at a certain price limit will be filed when that price is reached.

It’s worth keeping in mind too that after the limit price is triggered the price of the stock my rise or fall so the deal may not go through for example if the share price in relation to the specified limit price is too great.

The order may therefore buy or sell for more or less than the specified limit price.


Stop order

stop order

The stop order orders the purchase or sale of a stock once it’s reached a certain price.

Buy stop orders are put above the current market price and a sell stop order below the current price, with the potential benefit of reducing your loss or protecting your profits.

For over the counter (OTC) securities however a stop limit order to buy only becomes a limit order when the stock is offered at or near the stop price.

Similarly, a stop limit order to sell becomes a limit order and a stop loss order to sell becomes a market order when the stock is bid at or lower than the specified stop price.

You need to consider however that stop orders are not always accepted and depending on the platform or exchange you are using, stop orders can be refused under certain conditions and, equally, not all securities are eligible for stop orders.

To give an example of how a stop order works, if the current price of a stock is $50 and you don’t want it to fall too low, you could put a sell-stop order on of $45 perhaps and so if it falls to that amount or lower, the stop order is triggered. The stock is then sold at the next available market price.

While stop orders are common when selling securities, they can be used when buying them. This happens when you think that the stock may keep rising so you establish a buy-stop order to purchase the stock once it reaches a certain limit.

It’s important to note again that the stop price is not guaranteed for stop loss orders as the changes in the price of a security can vary dramatically due to market news or economic conditions.

With trailing stop orders, the stop price will trail either the current ask or bid by the number of points or percentage you specify - the main benefit of this is so it doesn’t have to be cancelled and re-entered as the price of the stock increases. The order is instead held on the broker/dealer’s server until the trigger is breached.


Long and short trades

In trading a basic but important concept is whether to trade long or short.

A long trade is a traditional trade where the buyer intends to profit from a rising market. All brokers will be able to facilitate this type of trade, and losses are limited to the value of the stock falling to zero.

Short trades however seek to make money from a falling market.

This is done by borrowing a stock, futures contract or other instrument from a broker and then selling them. Once the price reaches a certain level, traders buy back the shares and replace what was originally borrowed from the broker.

If the price drops the trade may be profitable but if it rises the trade may result in a loss to the trader.


Conditional orders

A slightly more complex stock order type is the conditional order, encompassing the order-cancels-order (OCO) and the order sends order (OSO).

In summary a conditional order should be used to place orders only if certain specified criteria are met - they can be appropriate when it makes sense to automate all or part of the buy and sell process.

Conditional orders are placed before the trade is submitted and are a very simple form of automation.

Order-cancels-order (OCO)

An OCO is essentially just a way of placing several orders simultaneously and so when one is filled, remaining orders in the group are immediately cancelled.

This makes OCOs useful for entry and exit into the market and one of the most useful of these is the bracket OCO - this places simultaneous stop and limit orders in the market.

As such an OCO can impose a stop order, a limit order and an order to close the remaining order - all three help protect profit and minimise losses.

Order-sends-order (OSO)

An order sends order (OSO) provides further automation by sending orders to the market once the trade entry order is filled.

In more detail an OSO is also a primary order that sends one or multiple secondary orders if the primary order is filled and can be used with an OCO, such as by enforcing a bracket order as soon as a trade is entered.


Time Limitations

Time limitations are imposed on stock orders to indicate how long they should stay active before expiring or being executed.

You have a range of time orders to place on stocks which we’ve outlined below.

Day orders

This one is fairly self explanatory - a day order lasts for the current trading session only.

Typically this does not include extended hours sessions before 9.30am ET or after 4pm ET. If you place a day order after the close of trading, the order is good until the close of the next trading day.

Good until cancelled orders

These are orders that can last much longer than day orders, and it can vary from platform to platform.

At Schwab for example it lasts 60 calendar days, but at Fidelity it lasts 120.

You need to check with your individual platform to see how long good until cancelled orders last. Some platforms do not even enforce an end date.

Fill or kill orders

These are orders to make the transaction in its entirety immediately, or it is cancelled if that is not possible. Some suggest this is a way of finding hidden liquidity.

Immediate or Cancel (IOC) order

This order ensures that any part of an order that can be filled is done so immediately and any part that can’t is cancelled immediately - the benefit is that it’s another way to find liquidity.

You can also have on the open or on the close orders.

On the open orders instruct the purchase or sale of a security as close as possible to the price at the open of the market.

On the close orders instruct the purchase or sale of a security at the end of the market or as close as possible.

For both on the open and on the close orders, any part of the order that can’t be executed on opening or closing is cancelled.


Order Qualifiers

These guidelines seek to bring together many of the elements of the other types of orders listed above. They include volume, time and price constraints.

The first is a minimum quantity order which means that you need a minimum number of shares to be executed before you can complete a transaction. Without this minimum number of shares, none of the order is then executed.

An example would be that if you made an order to buy 500 shares with a minimum quantity order to buy 250 shares, none of the order will go through until at least 250 shares can be bought. A downside of this is of course that it could prevent your order being executed at all.

Another order qualifier is the do-not-reduce order, specifying that a broker must not adjust the limit price of the order when the stock is adjusted on the ex-dividend date.

As a result, if you specify a good until cancelled (GTC) limit order to buy stock at say $50, and a week later the share reaches ex-dividend date for an approaching dividend payment of $1, your limit order would typically be reduced to $49.

A further order qualifier is the all-or-none (AON) order which means that an order you place must go through in its entirety or not at all.

For example, if you put an AON order to buy 300 shares, all must be bought or none at all unless for the full amount of shares. While this can prevent transactions being completed in part, it can also mean it is not executed at all.


Conclusion

While the above tips provide some helpful pointers about the different stock order types, this is by no means exhaustive.

It is well worth doing further research on this topic before diving in with trading stocks, which can be a volatile and unpredictable business.

Also, the rules and guidelines can vary from exchange to exchange and from one brokerage to another so you always have to know the rules for each one of those before trading.

Andrew
 

My name is Andrew and I run Slick Bucks to help folks learn to manage money cleverly, and how that clever management can make you wealthier.

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