Types of Orders Investors Use to Trade Stocks

Let us consider an investor who intends to purchase stocks but has not opened an account at a certain brokerage company yet. They should first make up their mind what type of financial intermediary services to use, as choices usually include opening an account at a full-spectrum service broker or a “discount brokerage firm”.

Some investors may decide they need services offered by both types of brokerages. If the investor pursues a piece of advice or wide-scale analysis, they would probably ask for assistance at the brokerage company, offering full-spectrum services.

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Provided that the investor decides to purchase a concrete financial instrument, they will probably use purchasing and selling services from a brokerage firm that specializes in this sphere. Something which investors should keep in mind is that full-service brokerage firms will name a higher price for their intermediary services.

To open an account, the trader must fill in a form similar to the one required when applying for a bank account. The form should then be sent back to the brokerage company along with a check. In a few weeks, this form will be processed by the company’s administration and sent back to the investor with details about the account, including an account number. Once done with this procedure, the investor may call an expert from the brokerage firm and send purchase orders.

Brief Introduction to Orders

For those of you who are new to trading, an order is essentially an instruction the investor sends to their brokerage directing them to buy or sell a security on their behalf. Investors issue orders either over the telephone, or more commonly, via web-based trading platforms.

Orders can be sent when one wishes to purchase or sell currency pairs, commodities, stocks, and other assets. There are different types of orders. Some indicate to the broker the specific price at which the trader wishes their order to be executed while others designate what time period they can stay in force.

The type of order investors choose should be based on their individual outlook for a given asset and trading style, i.e. whether they wish to get in and out of a position fast, whether they insist on the best possible pricing, and so on. Once an order has been initiated, the broker must execute it in line with the instructions it contains.

As a rule of thumb, trading securities involves a bid/ask procedure where the bid represents the highest listed price a trader is willing to pay for the asset and the ask is the smallest listed price another person would agree to sell the same asset at. In other words, someone should agree to pay a given price before a seller can sell the asset.

And vice versa, a seller should agree to sell the asset at a specific price before a buyer can purchase it at this exact price. The transaction is impossible unless both seller and buyer arrive on the same terms price-wise. The bid and ask values are always fluctuating since each bid/ask quote is essentially an order by itself. The values change as brokers fill their traders’ orders.

Suppose, for instance, there are two bid prices for the same asset, 20.35 and 20.36. Once the brokers fill all orders at 20.36, 20.35 would become the next best bid price. Understanding this process is crucial because the order type you choose influences the price the broker fills it at, when they fill it, and whether they can fill it in the first place.

Market Order

A concerned, several orders are widely used. The first and probably the most popular order is the market order. If the investor submits a market order, it means far as the types of trade orders aret they require their broker to buy or sell securities at the best possible price at the moment. Market orders are executed at any expense.

It is interesting to mention that market orders work well for high-volume securities as they tend to be filled quickly. These include stocks with large market capitalization, futures contracts, and exchange-traded funds (ETFs). Orders for the stocks of major companies with a large market cap, like Google, Microsoft, or Android are normally filled very fast and without a hitch.

This is not always the case with stocks that have a limited number of shares or very low average traded volumes per day. The bid/ask spreads are commonly wider here. This is why market orders are filled slower with such stocks and at unanticipated prices that can cause you to incur significant trading costs.

Another specific thing about market orders is they are unlikely to be executed at the price the investor prefers or expects. For instance, they intend to purchase a given number of shares in the ABC company. They simply call the brokerage firm and the expert on the phone announces that currently ABC is trading at a bid price of $45.00 per share and an ask price of $45.10 per share.

The investor submits a purchase order of 50 shares to the broker. A bit later, the broker calls back and informs the investor they bought 50 shares in ABC at the price of $45.20 per share. It appears the price rose during the time interval between the submission and the execution of the market order. Of course, investors should keep in mind the order could have been executed at a lower price, $44.80, for example, if the sellers outnumbered the buyers at that moment.

Some Market Orders Can Result in Slippage

Slippage is one issue traders must consider before they decide to use market orders. The term refers to the discrepancies between traders’ anticipated prices and the actual prices their orders are being executed at. Such differences might occur whenever traders send market orders during times of increased volatility. Slippage may also occur when too many orders are placed simultaneously in the absence of enough purchasing interest in a given asset.

It would be difficult, if not impossible, to maintain the anticipated trade prices under such conditions. Slippage is negative whenever one’s market order has been executed at a worse price than what they initially anticipated.

There are various ways to eliminate or mitigate slippage but the easiest one is to avoid market orders altogether and switch to limit orders. This is especially recommended for people who trade regularly or implement automated trading software.

Limit Order

A limit order is also commonly used by traders. When submitted, the broker will buy or sell a certain number of shares at a predetermined price or higher. If the price is not within the order qualifications, then the trading opportunity is missed.

Even though limit orders are not always executed, they provide investors with the opportunity to control at what prices they trade. Limit orders enable traders to buy or sell at specific prices or better but this does not guarantee they will be filled.

This type of order can be used on both already open positions or pending ones. In the first case, the limit order will terminate the position whenever the traded asset reaches a predetermined value.

Buy Limit Orders

Since they guarantee a profitable trade, such instructions are also called “take profit” orders. There are two main subtypes of limit orders, the first one being the buy limit or entry limit order. This is a pending order that instructs the broker to buy something at or below the specified price.

It gets filled when and if the asset reaches the trader’s preferred price. This order type is particularly useful for investors who anticipate a rise in the prices of an asset after their positions have been opened. For instance, an investor places an entry order at $3.50 when a company’s stock presently trades at $3.55.

One such order will not be executed until the stock’s price decreases to at least $3.50 or drops further down. Buy limit orders also enable traders to take advantage of price gaps that may occur from one trading day to the next.

Suppose the above-described order is not filled at $3.50 within the same trading day but still stays in place. The stock opens at $3.30 on the following day. The investor will then buy their shares at a lower price of $3.30 because this was the first available pricing at or under $3.50.

Sell Limit Orders

Another subtype of a pending limit order is the sell limit, which is pretty much the opposite of the buy limit. It instructs the broker to open a short position, i.e. to sell on your behalf whenever the respective asset’s price equals or exceeds a specific value. Such orders are usually used by traders who think asset value will decline after they open their positions.

Here is an example of how sell limits work. Let’s say an investor is looking to go short with a given company’s shares and wishes to do so at a price of $15.50 or higher. Said shares currently trade at $15.10 and the price fails to reach the designated limit of $15.50 before the end of the trading day.

There is a gap in the market so that the stock opens at $15.55 the next day. The sell limit order gets filled automatically since this price exceeds the minimum designated by the trader. This enables the trader to lock in greater profits from their stock positions.

Market Order vs. Limit Order

Before deciding whether to use a market order or a limit order, every investor should be aware of their advantages and disadvantages. The downside associated with the market order is that investors cannot set the price of the trade. However, this does not matter if you buy shares in large companies that are highly liquid.

Another drawback is that the price might significantly sink when trading illiquid stocks due to the lack of enough buyers or sellers. In other words, you can end up with a completely different price. Market orders’ biggest advantage is that they will certainly be promptly executed.

On the other hand, limit orders allow traders to select the price. Provided that the stock reaches this price or a better one, the order will be executed. The biggest disadvantage of these orders is that the trade might not take place at all if there is no demand or supply. Investors are recommended to go for limit orders if:

  • They do not mind to get only some of the shares they are targeting
  • They are not in a rush to get the shares
  • They have reasonable grounds to believe the shares have enough demand and supply

Traders are advised to use market orders provided that:

  • Quantity is their priority
  • They have grounds to believe that the shares will not reach a better price
  • They want their order to be executed regardless of the price

Stop Order

A stop order is an order to buy or sell provided that the price moves to a certain point referred to as the stop price. Once this point is reached, the stop order morphs into a market order. Similarly to the limit order, here we can distinguish between several sub-varieties of stop orders.

One thing these variations have in common is that they are based on prices that are unavailable in the markets at the time the traders post their stop orders. The latter get filled whenever the future prices become available in the market.

Buy Stop Orders

A stop order is an order to buy or sell provided that the price moves to a certain point that is referred to as the stop price. Once this point is reached, the stop order morphs into a market order. Similarly to the limit order, here we can distinguish between several sub-varieties of stop orders.

One thing these variations have in common is that they are based on prices that are unavailable in the markets at the time the traders post their stop orders. The latter get filled whenever the future prices become available in the market.

Sell Stop Orders

If the stop price is below the current market price, a sell stop order is entered. This is a pending instruction to sell a given position whenever an asset’s price drops to a predetermined value or under. Investors would initiate sell stop orders when they think the prices of an asset will dip even further after they open a position.

For instance, an investor has purchased a company’s stock at the price of $45 per share but is reluctant to risk a loss exceeding $5 per share from this trade. They initiate a sell stop order slightly below $40 per share, at $39.90 for example. Provided that the market price moves to $39.90 or lower, this automatically triggers the sell stop order so that the stock gets sold at the next available price.

Both sell stop and buy stop orders are used as safety nets. Trailing stop orders occur when one enters stop parameters that result in a moving price. These provide traders with a maximum profit when prices go up and decrease losses when prices go down.

Stop Order vs Limit Order

Even though stop orders and limit orders may sound pretty much like the same thing, they are completely different. A limit order is visible to the market and is executed at a specific price or better. On the other hand, a stop order is not visible to the market until a stop price has been met to activate a market or a limit order.

Traders should be informed that there is no risk of missing trading opportunities with the stop order. But being a market order, the trade might be executed at a price way worse than the one you were hoping for.

Other Types of Trading Orders

Apart from the widely used stop and limit orders, there are several types of conditional and duration orders commonly offered by stockbrokers. These include good ‘til canceled, immediate or cancel, all or none, and fill or kill orders, among several others. Let’s have a closer look at each of these order types.

Fill or Kill Order (FOK)

Investors can submit the so-called fill or kill (FOK) orders. They are usually used to trade futures and options contracts but are also valid in stock trading. These orders are limited in time. For instance, if the investor submits a 25-minute fill or kill instruction, this means the order will be canceled, unless it is filled within the next 25 minutes.

It is usually used when buying a large number of stocks. This type combines the features of all or none and immediate or cancel orders. It is mostly deemed suitable for active investors who handle large trading volumes. Its goal is to ensure that positions are executed timely and in full at a prevailing market price or not executed at all.

By means of example, let’s suppose a trader is looking to buy 1 million shares of company X at a price per share of $25. If they insist on immediately purchasing this exact number of shares at this price or better, they should initiate a fill or kill order.

The order will be canceled (or killed) provided that the brokerage firm possesses over 1 million shares in X stock but is unwilling to sell more than 900,000 of them at this price ($25). The same would happen when the broker is ready to sell 1 million shares of X stock but at a different price, like $25.03.

Good ‘Til Canceled Order (GTC)

Good ‘til canceled (GTC) orders are more specific as they last until the order is filled or canceled by the investor themself. With most brokers, such orders can remain open or active for no more than ninety days. Investors typically resort to such orders when looking to reduce their daily portfolio management.

GTC orders expire up to ninety days after they were initiated to prevent them from getting filled all of a sudden in case investors have forgotten about them. Traders take advantage of this order type whenever they wish to purchase stocks at a price below the present trading level or dispose of them at a price that exceeds it.

For example, If the price per share of company X’s stock is equal to $90, a trader might initiate a good ‘til canceled buy order at $85. It will get filled provided that the shares of X decline to this level before the order is canceled by the trader or reaches its expiry date.

Immediate or Cancel Order (IOC)

Immediate or cancel (IOC) orders are mostly implemented during volatile market periods. These can be submitted as limit or market orders. An immediate or cancel market order lacks instructions for a specific price. Instead, it gets filled at the best buy or sell price that is presently available. By contrast, the IOC limit order is placed with a certain price attached to it.

Such orders can be filled only partially. This peculiarity makes them suitable for high-volume investors who want to prevent having their orders executed at several different prices. Suppose, for instance, an investor initiates a large order to buy 10,000 shares in Nvidia (NVDA) stock. If only 9,000 shares are bought immediately, the remaining 1,000 will be automatically canceled.

Here is another example for further clarification. A person sends an IOC market order for the purchase of 10,000 Nvidia shares. According to the order book, there are 20,000 shares bid at a price of $546.41 and 5,000 shares offered at $546.45. Thus, this investor’s order will automatically fill the 5,000 shares at the offer price of $546.45 while the other 5,000 will be canceled.

All or None Orders (AON)

All or none orders are instructions to brokers that require them to either fill traders’ orders in full or not to fill them at all. Such orders get canceled whenever there are not enough shares of a given company’s stock to fill the orders completely. This is considered a duration type of order because if the broker fails to execute it right after submission, the order remains active for the duration of the trading day until it is either filled entirely or negated.

The execution of such orders normally requires more time due to the exact specifications the investor gives to the broker. Partial fills are impossible with such orders. This benefits traders who invest in narrow markets.

Let’s say a trader initiates an all or none order to buy 300 shares of AMD stock at a price of $94 per share. The AON order will not get executed unless market conditions make it possible for all 400 shares to be bought at $94. Both the number of shares and the price requirement per share are specified by the trader.

One such order stands a good chance of being filled within the trading day simply because this is a nominal number of shares to buy considering the daily trading volume of a company like AMD. Things get trickier with more sizable all or none orders.

Execution becomes more difficult when the AON order comprises a higher percentage of a company’s daily traded volume. Thus, it would be harder for a broker to fill an AON order for 300,000 AMD shares at $94 compared to executing an order for 300 shares at the same price.

On Open and On Close Orders

We can also distinguish between market on open (MOO) and market on close orders (MOC). With MOO, the investor instructs the broker to fill their order at the first available price when the market opens for the day. The MOC order is basically the opposite, i.e. an instruction to execute a trade as close to the market’s closing price as possible.

MOO is usually implemented during periods when companies announce their financial results for the quarter. Since such announcements occur after the markets have closed for the day, they can bring about significant price fluctuations at the start of the following trading day. If the company’s fiscal performance has exceeded expectations, the value of its stock will rise, and vice versa.

MOC is filled when the markets close or shortly after that at closing prices. When a MOC gets activated at or after the end of the trading day, it transforms into a regular market order. Such orders are typically used as a precaution against drastic price movements overnight.

Such fluctuations can be again caused by anticipated news releases and after-hour fiscal reports. They help investors to secure a stock purchase before the news spreads on the following day. One obvious downside here is that there is no guarantee the order will get filled at a good price, as is also the case with MOO orders.

Day Orders

A day order also belongs to the duration category of instructions, along with the good ‘til canceled and immediate or cancel orders. This is a directive that tells the broker to execute an investor’s trade at a prespecified price. If the broker fails to do that before the trading session ends, the order is automatically negated.

Most trading platforms use the daily trading session as their default order duration. Traders must designate another timeframe if they do not want their position to expire when left unexecuted by the day’s end. Day orders can be very beneficial when one seeks to purchase or sell securities at a certain price.

They spare traders from having to surveil their positions for the remainder of the day while waiting for the best moment for order execution. This makes it possible for intraday traders to watch and open multiple positions simultaneously.

Bottom Line

Understanding the different order types available to you is important because the orders you use can significantly impact your results as a trader. If you are new to stock trading, we suggest you start by mastering the basic order types like market, limit, and stop before you incorporate advanced orders into your strategy. Sometimes keeping things simpler is the best strategy for novice stock traders.

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