Trading Order Types

Two Trading Order Types are always involved in a transaction to be considered complete: They submit orders to purchase and sell the same security. Trading equities, currencies, and futures all use the same order types.

Traders may make trades with various order types in various permutations. What follows is a breakdown of the most critical order types and some examples of how they are often used in trading.

Key Takeaways

• Market orders are processed the quickest, but they do not guarantee a specific price for filling the order.
• While limit orders promise to execute at a specific price, they will not if market prices fall below the set barrier.
• If your position swings too far against you, a stop order, also known as a “stop-loss” order, will automatically convert to a market order to limit your losses.
• Complex orders, such as stop-limit and market-if-touched, are constructed from these three fundamental order types.

The Basics of Placing Orders

• No matter what kind of order is being made, it is always necessary to specify whether to purchase or sell. Each order type described below may be used to purchase or sell stocks. You may enter or terminate a transaction using a buy or sell order. The purchase order to initiate a transaction will be followed by a sell order used to close the deal. A sell order initiates a transaction, while a purchase order closes the position.
• In its simplest form, a trader bets that the price of a stock will rise. A single purchase order is used to initiate the deal, and a single sell order is used to close it. The investor will earn a profit if the stock price rises between the buy and sell orders.
• If a trader anticipates a decline in a stock’s price, they could enter the market with a sell order and leave with a purchase order. This practice is more frequently known as “shorting” or “shorting a stock” and entails selling shares of stock to repurchase them subsequently.

Market Orders (MKT)

• Market orders are placed to purchase or sell at the current market price. 
• Although market orders will be filled instantly in a liquid market, the price at which they are filled may be different from what the trader expected.
• When the optimum price for acquiring a stock is $129, a trader may issue a market order to buy the stock, even if the company’s price fluctuates widely and millions of shares swap hands daily. The price might rise to $129.50 in the time it takes for an order to be made and processed. The market order would cause the investor to pay a higher price for the stock. It is termed “slippage” when the price swings in the wrong direction after placing a market order.
• If you need your order filled fast and are willing to accept less-than-ideal pricing, you should utilize a market order. The “ask” price is when another buyer is ready to accept your market order to purchase a security. If you place a market order to sell, it will be completed at the “bid” price, or someone else is prepared to pay the most.

Limit Orders (LMT)

• A limit order is an order to purchase or sell an asset at a specified price or better.
• Whether or not they are filled depends on the market conditions and the limit price established by the trader. A trader’s orders may or may not be completed, but if they are, they will always be at the anticipated price (or at a better price than expected). With a limit order, the buyer guarantees a specific price but accepts the possibility that the purchase may not be completed.
• Whether an order is “better” to purchase or sell depends on the nature of the order. For example, a limit buy order placed at $50.50 would be honored only if the stock could be acquired for that price or less. Your order won’t go through if your broker can’t locate a seller prepared to part with the shares for $50.50 or less.
• In contrast, a limit sell order at $50.50 would be placed if the seller expected the stock price to rise to that level or higher before the shares were sold. For the purchase to go through, another buyer must be ready to pay at least $50.50 for the shares.

Stop Orders (STP)

Like market orders, stop orders seek to acquire or liquidate an asset at the current market price. These orders, however, are only fulfilled if the market reaches a specific price. An order at such a price minimizes losses by buying or selling shares in the opposite direction the trader expects it to move. For this reason, “stop-loss” instructions have become common parlance.

Note

• The stop loss level for a purchase order is always higher than the current market price. The stop loss level for a sell order must be less than the current market price.
• If a stock you own is trading at $12.57 right now, you may set a stop order to sell it at $12.50. If the stock price drops below $12.50, your stop order will be converted into a market order to sell, and you will be free to unload your shares at the current market price. Everything will happen once the price falls below $12.50.
• Stop orders to purchase are of little utility to novice traders, but they may be valuable if a trader begins shorting equities. Short sellers anticipate a decline in the stock’s price and may place a sell-stop order above the price at which they shorted the security to protect themselves against an unexpected rise in the stock’s value.
• Keep in mind that when you “short” a stock, you are selling it with the intention of “covering” your sale by purchasing it at a later date (hopefully, after the price has fallen). For example, a trader shorting a stock at $50.75 may set a stop order to purchase it at $60. This method closes the deal immediately whenever its share price drops by $0.25.

Stop-Limit Orders (STPLMT)

• Traders often pair a stop order with a limit order to control the price they pay more precisely. Stop-limit orders function similarly to stop orders, but instead of becoming market orders when the stop prices are reached, they transform into limit orders.
• Like regular limit orders, stop-limit orders assure traders of a specific price but make no promises about the order’s actual execution.
• Both the stop and limit prices of a stop-limit order are flexible. By way of illustration, a stop-limit sell order may have a $50 stop price and a $49.50 maximum price. As the stock price falls below $50, the stop-limit sell order will convert to a limit order, but the trader’s shares won’t be sold until a price of $49.50 or above is achieved.

Trailing Stop Orders

• Stop and limit orders allow for placement at a predetermined price or concerning the current market price. A trailing stop order occurs when a stop or stop-limit order follows the market price movement (or trailing stop-limit order). Traders use this tactic to safeguard their earnings.
• For instance, a buyer may pay $50 for a stock share. The stock price might reach $53 a week later. The trader may place a sell trailing stop order $2 below the current market price. The trader might lock in a profit if the stock price fell below $51 the next day, at which point the trailing stop order would convert to a market order to sell. If the stock price rose to $55 the following day, the trigger price for the trailing stop order would rise to $53.
• With trailing stop orders, the trigger price may be set in absolute terms or as a percentage of the current market price.

Market-if-Touched (MIT) Orders

• Similar to limit orders, but with no price guarantee, is the market-if-touched (MIT) order. It allows investors to establish target prices rather than purchasing at the current market price and lets them execute more swiftly. When the specified price is reached, the MIT order automatically converts to a market order made by the trader.
• Take the hypothetical case of a trader who wants to acquire a share of stock selling for $70 but prefers to spend less. They may initiate a purchase order in MIT at a $60 price point. The MIT order will convert to a market order, and the trader will purchase the shares at $60.

Note

There is the possibility of slippage with MIT orders, just as with a regular market order. Therefore, traders may only set the price at which a market order is executed using MIT orders.

Limit-if-Touched (LIT) Orders

• Although a market-if-touched (MIT) order would place a market order, a limit-if-touched (LIT) order would place a limit order.
• Unlike regular limit orders, the trader who places a LIT order has control over both the trigger price and the limit price.
• Let’s use a stock trading at $16.50 as an example. LIT purchase orders may have a $16.40 trigger price and a $16.35 limit price. Once the price drops at or below $16.40 (the trigger price), a $16.35 limit order will be placed. Considering the nature of the request, shares will be purchased at no higher than $16.35. It doesn’t matter whether the LIT trigger price has been met if no seller is available at or below $16.35 for your purchase order to go through.

The Bottom Line

• To join or leave a position rapidly, traders employ market orders—the fastest option to fulfill an order but also the least flexible in pricing. Nevertheless, a limit order will execute slower but guarantee the lowest possible selling price and the highest possible purchasing price.
• Use a stop order with a market order to limit your potential losses should the deal go against you. Stop-limit orders use similar strategies. However, limit orders are used rather than market orders. To safeguard earnings, traders might use either a trailing stop order or a trailing stop-limit order.
• If a particular price is reached, market orders are activated. Conversely, limit-if-touched orders are executed when a predetermined price threshold is hit.

Frequently Asked Questions (FAQs)

Which order type should I use, and how do I do that?

Several of the order types described here will be used by experienced traders. Depending on your trading style and the nature of your position, you’ll need to know when to use each. For example, a market order is what you’d use if you had a stock that was rapidly declining in value and wanted to sell it as soon as feasible. As a long-term investor, you may use a stop-loss order to hedge against the risk that your stock may decline in value. Finally, you may use a limit order to sell automatically when you reach your profit objective.

Why do stock exchanges make so many different kinds of orders?

Order types are developed and managed by brokers, not stock exchanges. In general, brokerages provide a wide variety of order types to meet the needs of their clients. Access to various order types expands your potential when trading stocks. If you’re a beginner trader searching for a brokerage and have a choice between two firms, one of which provides more order types than the other, you will choose the firm that does.