Even if you know exactly which stocks you want to buy or sell, things can get confusing when your brokerage firm asks what kind of order you want to place. The alternatives have names that may be unfamiliar — stop-loss? Trailing stop-limit?
To help make sure you place the kind of order you want, here is a guide to some of the most common types of orders. This isn’t a comprehensive list, however, so it may be worth talking to your broker about other alternatives that may be a good fit for you. Stay tuned for our companion story, where we’ll talk about time-in-force alternatives for stock trades.
Market Order: No Frills
This is the simplest order type. Place a market order, and you essentially ask your broker to buy or sell shares as soon as possible at the best price reasonably available during normal market hours — that is from 9:30 a.m. through 4:00 p.m.
But keep in mind that when a stock is seeing a lot of trading activity, there might be a difference between the price you are quoted when you place your order and the price you actually receive.
And if you submit a market order before or after trading hours, you run the risk that breaking news or other factors could significantly change the price of the stock in question before it is executed when normal trading hours resume.
Limit Order: Set Your Price
While market orders can leave a buyer or seller exposed to changes in the current price available in the market, limit orders allow you to decide at what price you want to buy or sell. Once you pick a target price, you’ll be asked to set a time limit on your order. The order will only be filled if the stock hits the specified price — or a more favorable one — within that time frame.
Here’s an example: Say you bought a stock at $55. It’s trading at $58 now, and you want to sell it, but only if you can sell it at $60 or above. You could place a limit order that expires in a month so that the stock automatically sells if a buyer willing to pay $60 or more hits the market — that could include trading outside of normal market hours if you so choose.
But if the stock stays below $60 for the next month, your order won’t execute and will get cancelled. In fact, even if it does hit $60, your order isn’t guaranteed. That’s because exchanges execute trades in a specific order, and if you’re at the back of the line, there is a risk that shares will not be available at your limit price or better by the time your turn comes around.
Sell Stop Order: Avoid Catastrophe
A stop order to sell does just what it advertises — limits your losses if a stock you own falls more than you would like. Generally, a sell stop order allows you set a floor for the price of a stock you own. If the stock’s trading price hits that floor, an order to sell is automatically triggered.
But unlike a limit order, which guarantees you will get a price at least as good as the one you chose, placing a plain vanilla stop order triggers a market order once activated. That means that, if your floor for the stock’s price is $50, your broker will then seek to sell your stock at the best possible price reasonably available in the market as soon as the stock hits the $50 point. If the market’s moving fast, you could potentially receive less than $50 a share by the time your order is executed.
Buy Stop Order: Cure for the Fear of Missing Out
Everything we just said about the sell stop order? Reverse it! In a buy stop order, you set a target price, and a market order to buy shares is automatically placed when the stock price hits your threshold.
Stop-Limit Order: Stops Where You Can Set Your Price
If you don’t like the idea of your stop order triggering a market order, you can instead place a stop-limit order, in which your stop order is designed to trigger the activation of a limit order instead of a market order.
In practical terms, this means that, in addition to the stop price, you’ll set a limit price at which you’re willing to buy or sell. Your shares will only be bought or sold if your broker can obtain that limit price or better. As with any limit order, the potential downside is that there is no guarantee that your order will be executed.
Trailing Stop-Loss: A More Flexible Option
A trailing stop order is like a regular stop order, only it sets your stop price differently. In a trailing stop order, you tell your broker that you want to sell if your stock declines a certain percentage or dollar amount from its market price at the moment.
For example, if you set a five percent trailing stop when your shares in Company A are worth $40 and set your stop so that it remains in effect until you say otherwise (known as Good Till Canceled, or GTC, order), a five percent drop (or, in this example, a drop of $2 to $38 per share) would trigger a market sell order. But if the shares increase in price, so too would the stop price in order to maintain that five percent threshold.
So, if Company A’s shares move to $50, the stop price becomes five percent of $50 (or, in this example, a drop of $2.50 to $47.50 per share).
But that trigger only moves one way. If the stock peaks, and then declines, the stop price would hold steady at its highest point. If the stock price slides enough to fall through that high point, it would trigger a sale.