What is an order in stock trading?
An order is an instruction to buy or sell on a stock market. An investor can send the instruction directly to a stock market or via a broker or brokerage service.
Types of orders are, inter alia, market orders, limit orders, stop orders, also referred to as stop-loss orders, and stop-limit orders.
Market order
A market order is an order to buy or sell stock immediately at the current market price. The order will be executed, but the execution price is not guaranteed. The buying- or selling price is set by the market and not controlled by the investor.
What is a limit order?
A limit order is an order to buy (buy limit order) or sell (sell limit order) stock at a specific price or better during a specified time frame.
To prevent investors from unwanted buying or selling stock prices, a limit order will not be executed if the market price is not in line with the limit order price.
Buyers use limit orders as protection from sudden increases in stock prices, while sellers use limit orders to safeguard themselves from sudden plunges in stock prices.
However, you could miss out on either buying or selling opportunities if the limit order price is not met.
A limit order is visible to the market, meaning, it is known that your aim is to make a deal and your price informs other prices.
Limit orders can either be set indefinitely or time frames can be applied. Some time frames are:
- A day order or good for day order (GFD), which is the most common time frame and is in force from the time the order is submitted to the end of the day’s trading session on the specific stock market.
- Good-till-cancelled (GTC) orders require a specific cancelling order, which, in theory, can remain in place indefinitely. However, brokers may set some time limits, for example 60 days.
Brokerage fees, are usually more for limit orders than for market orders, mainly for two reasons:
- They are not guaranteed – if the market price never goes as high or low as the investor specified, the order is not executed.
- They are more technical and less straightforward transactions, which cause more work for the broker, with the result of higher fees.
This type of order is a way to manage your stock trades without having to constantly monitor the market yourself.
Limit orders are also referred to as “take profit” orders or “pending” orders.
Investors may cancel a limit order or stop order, for any reason so long as the order has not been executed yet.
Buy limit orders
A buy limit order is a pending order to purchase stocks at or below a specified price, allowing traders to control how much they pay. By using a limit order to activate a purchase, the investor is guaranteed to pay the buy limit order price or less.
If an investor expects the price of a stock to decline, then a buy limit order is a reasonable order to use.
For example, an investor could place a buy limit order at $10.50 when a stock is trading at $11.10. If the price drops to $10.50, the order is automatically executed. It will not be finalised until the price drops to $10.50 or below.
With a buy limit order the price is guaranteed, but the order being executed is not. For an order to be completed, the stocks need to reach the specified price. The execution of an order is also called a fill.
The price of a buy limit order cannot be set above the market price, because a better price (the market price) is already available.
Sell limit orders
A sell limit order allows an investor to sell a stock at a specified or higher price. This gives the seller the guarantee that the stock will be sold at the sell limit order price or higher.
For instance, if you own stock worth $100 per share and you are willing to sell at $120 per share. With a sell limit order set at $120 per share, the deal will only be closed at $120 per share or better.
A sell limit order price below the current market price is not possible, because the current market price is already a better price.
Buy stop orders (Also known as buy stop-loss orders)
A buy stop order instructs a broker to buy a stock when it hits a predefined price, the stop price, that is higher than the current market price. Once the stop price is hit, the buy stop order becomes a market order, to be executed at the next available market price.
The buy stop order has the underlying assumption that a share price that climbs to a certain height will continue to rise.
A buy stop order is a strategy to help minimize losses on an uncovered short position.
Sell stop orders (Also known as sell stop-loss orders)
A sell stop order is entered at a stop price below the current market price.
As with a buy stop order, when the stop price is reached, the sell stop order is converted to a market order, to be filled at the next available market price.
A stop order guarantees an order execution but not necessarily at the stop order price.
Different than limit orders, stop orders can be exposed to some slippage since there will typically be a marginal discrepancy between the stop price and the following market price execution. Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed.
Sell stop orders are generally used to limit losses or protect profits on stocks.
Stop-limit orders
A stop-limit order is an order that combines the features of a stop and limit order. With the instruction of a stop-limit order two prices are set: the stop price and the limit price.
The order is not activated until the specific stop price is reached. Once the stock hits the stop price, the order is converted into a limit order, which is executed at the specified limit price or better.
The limit price shows how much investors are willing to pay to buy or how much they will take if they are selling.
Although a price limit is guaranteed, there is no guarantee that a stop-limit order will be filled, especially if the stock price is rising or falling rapidly.
To protect the investor from considerable losses, stop-limit orders are sometimes used, because if the price of the stock falls below the limit, the investor does not want to sell and is willing to wait for the price to rise back to the limit price.
Example: An investor’s stock currently trades at $20 and would like to sell the stock if it decreases below $17, but only if the stock can be sold at $16 or more. A stop-limit order is set with a stop price of $17 and a limit price of $16. Once the stock price dips below $17, the order becomes a $16 limit order. If the stock price falls below $16 before the order is executed, the order will not be executed until the price increases to $16.
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