Stock Market Order Types That You Should Know

Importance of Stock Market Orders

Stock market orders are like the steering wheel of your trading journey, allowing you to control the execution of your trades precisely. They help traders specify the price at which they want to buy or sell a stock and the conditions under which the trade should occur. Without these orders, trading would be chaotic and unpredictable, often leading to undesirable outcomes.

Limit orders provide price control, market orders offer speed, and stop orders provide protection.

Now, let's explore the three basic stock market order types:

1. Market Order

A market order is an instruction to buy or sell a stock immediately at the current market price. Unlike limit orders, market orders prioritize execution speed over price.

Market orders are swift and guarantee that your trade will be executed, but they don't guarantee the execution price. You will buy at the current ask price if you're buying and sell at the current bid price if you're selling, which can lead to price slippage in volatile markets.

Example: You decide to sell your shares of Company Y, and its current market price is $75. You place a market order to sell, and your trade is executed immediately at the prevailing market price of $75.

2. Limit Order

A limit order is an order to buy or sell a stock at a specific price or better. This means that a trader sets a predetermined price, known as the "limit price," at which they are willing to execute the trade.

Limit orders are valuable because they allow traders to exercise control over their entry or exit prices. When buying, you will only purchase the stock if it's available at or below your specified limit price. When selling, you'll only execute the trade if the stock reaches or exceeds your designated price.

Example: Suppose you want to buy Company X's stock, which is currently trading at $50 per share. You set a limit order with a limit price of $48. If the stock's price drops to $48 or lower, your order will be executed at that price.

Further Read: Market Order vs Limit Order: Key Differences and More

3. Stop Order

A stop order is designed to limit potential losses by triggering a market order when a stock's price reaches or surpasses a predetermined level known as the "stop price." Stop orders are defensive tools that protect traders from significant losses. Stop orders can be of 2 types, Sell Stop Order and Buy Stop Order.

Sell Stop Order: A sell stop order is used to minimize a loss. It is usually placed below the current market price and once the market price falls below that point, this order is converted to a market order and all the stock is sold at that price.

Example: You own shares of Company Z, and they are currently trading at $60 per share. To protect yourself from a steep decline, you set a sell-stop order with a stop price of $55. If the stock's price drops to $55 or lower, your stop order becomes a market order, and your shares are sold at the prevailing market price.

Buy Stop Order: You can also set up a buy stop order to buy a stock once it exceeds a certain stop price. You can use this to buy a rapidly increasing stock but only once it has substantially increased and you are positive that it will go further up. You can use this order to buy a stock at a relatively low price and sell it once it has increased to your desired price.

Example: Suppose there is a Company Z, and its stock is currently trading at $60 per share. You have a good reason to believe that if the price exceeds its resistance level of $63 then the stock can reach up to $70. Now, you can set up a buy-stop order to buy the stock once it reaches $63. This order will become a market order if the price exceeds $63.

Further Read: Stop Order: Definition, Types, and Usage

Time in Force Orders

Beyond the basic order types, traders can also choose from various time-in-force (TIF) orders. These determine how long an order remains active in the market. Here are some common TIF orders:

Day Order

A day order is valid for the trading day on which it's placed. If not executed by the market close, it expires. It must be traded within that day.

Good 'Til Canceled (GTC)

A GTC order remains active until it's executed or manually canceled by the trader, regardless of how many trading days pass. Good 'Til Canceled on most brokerages can remain active for 90 days. At Schwab, these can remain open for 180 days.

Fill or Kill (FOK)

An FOK order must be executed in its entirety as soon as it's placed; otherwise, it's canceled. It cannot be executed partially.

Immediate or Cancel (IOC)

An IOC order is a little more flexible than a fill-or-kill order. It has to be executed immediately but there is no restriction of a complete execution. It can be canceled even after a partial execution.

All or None (AON)

An AON order specifies that the entire order must be filled, or none of it is executed. There is no time limit for immediate execution. It just needs to be fully executed.

Conclusion

Stock market orders are the bedrock of trading, enabling traders to control their investment decisions effectively. Limit orders provide precision, market orders offer speed, and stop orders provide protection. Understanding these order types and when to use them is essential for success in the stock market. Additionally, familiarity with time-in-force orders can help traders tailor their strategies to their specific needs and preferences.

As you embark on your trading journey, remember that the choice of order type should align with your trading goals, risk tolerance, and market conditions. Each order type has its advantages and drawbacks, so it's crucial to weigh them carefully before executing your trades.