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Order Types

When you place an order to buy or sell securities, in some cases the price quoted to you at the time of the sale may not exactly match the price you pay for your securities. This can happen because quotes may be delayed, trades take time to execute and, in highly volatile markets, millions of shares can trade in microseconds causing price swings.

You do, however, have the power to exercise some control over these factors by choosing the type of order you place. Understand the benefits and risks of various types of orders to help avoid unintended losses and better ensure that your trades are executed in a timely manner and at a price with which you are comfortable.

Common Order Types

Orders fall into three primary categories:

Market Order. This is the most common type of investor order, and brokerage firms typically enter your order as a market order unless you specify otherwise. This type of order provides the most certainty that your order will be executed because it's not tied to any restrictions. A market order generally will execute at or near the current bid or ask prices in the marketplace during normal trading hours, 9:30 a.m. to 4 p.m. Eastern Time. On the downside, you might not get the price you saw or were originally quoted, especially in fast-moving markets. Also, if you place your order before or after normal trading hours, consider the possibility that news events or other factors might significantly impact the price of the security when the market opens again.

Limit Order. This is an order to buy or sell a security at or better than a specified price (a "limit price"). Limit orders are for investors who know the price they want for a particular securities transaction and want to manage market risk, and they are often used when obtaining the right price is more important than quick execution. 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. A buy limit order can be executed only at or below the limit price; a sell limit order can be executed only at or above the limit price. This means you're guaranteed to get your limit price or a better price if your order is executed. 

However, there's a chance your order doesn't get executed at all. For example, if the market price fails to match or better your limit price while your order remains active, it will not be executed. Some limit orders include a time limit within which the trade must be placed at (or better than) the specified price. These orders generally might have higher execution costs than market orders.

Stop Order. This is an order to buy or sell a security once the price of the security reaches a specified price, known as the "stop price." When this stop price is reached, the order automatically turns into a market order and is executed as soon as possible at the current market price. There are different types of stop orders:

  • Sell stop order: This type of order can help limit your losses if a stock you own falls more than you'd like. When triggered, the order becomes a market order, with shares sold at the current market price.
  • Buy stop order: With 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: If you don’t like the normal situation in which a stop order triggers 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.
  • Trailing stop-loss order: This type of order is similar to a regular stop order, only this type of order sets your stop price differently. In a trailing stop-loss order, you tell your brokerage firm that you want to sell if your stock declines a certain percentage or dollar amount from its market price at the moment.

Investors use stop orders as a tool to manage market risk. You can generally use sell-stop orders to limit a loss or protect a profit position in the event the stock’s price changes. If you have a short position, you can generally use stop-buy orders to limit losses in the event the stock’s price increases. Some investors like stop orders because they don't have to continually monitor price movements to sell (or buy) at a specific price target.

Time Mandates and Other Conditions

Market, limit and stop orders can include time mandates and other conditions. For instance:

  • Day Order is a market or limit order that expires at the end of the trading day it was placed if it's not executed.
  • Good 'Til Canceled (GTC) is a limit order that remains in effect until it's executed by the broker or canceled by the customer.
  • On Open is a market or limit order that must be executed when the market opens or reopens. Any balance not executed as part of the opening trade is canceled.
  • On Close is a market or limit order that is either entered in its entirety at the closing price or canceled.

Know Your Options

Before building a buy or sell strategy on certain types of orders, ask your brokerage firm what types of orders you can place and what they cost. Because not all orders are handled the same way, ask about your firm’s procedures for handling the execution of securities transactions and different order types, particularly during volatile market conditions. Market orders typically receive the highest priority, followed by limit orders.

When you use order types with automatic triggers, consider that these transactions might have unintended tax consequences. For example, you could end up paying a higher tax rate on your capital gains.

No matter what type of order you choose, you cannot completely eliminate market and investment risks. You cannot predict when periods of market volatility will hit, so it's often best to decide what is most important to you based on your investment goals and objectives.