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What You Need To Know About These 3 Stock Order Types

Explaining how beginner investors can utilize market orders, limit orders and stop orders to buy shares in the stock market.

🧭 Key Takeaways

There are 3 common types of stock orders. Market orders are executed at the current share price of an stock. Contrary, limit orders are executed when the share price reaches a specified limit price. Finally, stop orders are being converted into a market order once a specific price is reached.

As with most things in life there’s more than one way to purchase a share in a company. Aside from the commonly used market order investors also have limit and stop orders at their disposal. Knowing the differences between those can help investors to properly take advantage of the stock market and help them protect their investments.

In this beginner-friendly guide we will explain the different types of stock orders and how investors can use them to their advantage.

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What Is A Stock Order?

A stock order is being used by investors for buying or selling stocks in a company. Each order specifies the following informations:

  • Whether the stock order is a market order, limit order or stop order.
  • If the stock order is supposed to buy or sell company shares.
  • The amount of company shares which are being bought or sold.
  • The timeframe in which the order is supposed to be executed.
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How Long Is A Stock Order Valid?

There are two common order execution timeframes:

  • By default stock orders will be valid for the day on which they were created. The exact timeframe depends on the time zone in which the stock exchange where the stock is being traded is located.
  • Good 'til cancelled orders (GTC) are valid until the order is being cancelled by the buyer. A GTC order will not expire automatically and must be cancelled manually.
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Who Is Handling Stock Orders?

A stock order is usually being handled by a brokerage, such as Trading 212 or Interactive Brokers. They act as a intermediary between the buyer and seller for the transaction. In return for handling the order the brokerage will charge a commission. The amount of commissions a buyer has to pay depend on the fees of each individual brokerage. However there are also brokerages, like Trading 212 or Robinhood who offer commission-free trading.

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Market Order

What Is A Market Order?

A stock market chart showing a market order being executed.
Market orders are executed immediately once a seller or buyer is found.

A market order is the simplest way investors can purchase a stock. When submitting a market order the brokerage will immediately execute the transaction at the current market price. The only precondition is that a buyer or seller has been found. Generally market orders are most appropriate when an investor thinks a stock is priced right or when he wants to fill the order immediately.

The biggest advantage of a market order is that the order gets executed as soon as a possible. Therefore the order is very likely to get filled as there are no conditions attached to the order. The downside is however that the exact execution price is not known in advance.

Market orders can be executed both as a buy or sell order. In a buy market order the brokerage will purchase company shares for the investor at the current market price. Contrary, in a sell market order the currently owned company shares will be sold.

When Will A Market Order Get Executed?

Submitting a market order does not guarantee its immediate execution as the number of outstanding shares is limited. Therefore for every market order to buy company shares there needs to be a corresponding sell order and vice versa. Hence the execution of the order depends on the trading volume of the stock as well as the market volatility.

Another factor is the size of the stock order. Generally large orders are harder to fill than smaller orders. To combat this some brokerages offer to split larger orders into multiple smaller orders.

How Does Market Volatility Affect Market Orders?

Price fluctuations from high trading volume can cause the total price paid for a market order to deviate from the price at which the order was submitted. Generally large-cap and mid-cap stocks tend to have higher trading volumes than low-cap stocks and therefore can be filled faster.

There are many influences which can impact share prices which investors are subjected to when relying on basic market orders. How much these influences come into play depend on the overall market volatility as well as the volatility of the share price of the ordered stock. A market order for a stock with low volatility is less likely to suffer from short-term share price influences than one with higher volatility.

To avoid losses market orders should not be set outside of the normal trading hours. Otherwise the order could be executed on the next trading day on which the price could’ve changed significantly during after hours.

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Limit Orders

What Is A Limit Order?

Stock market chart showing a limit order executed at the specified price
Limit orders are executed once at the defined limit price.

Compared to market orders investors gain more control over the execution price of a stock order with a limit order. Contrary to the market order a limit order executed once the current market price reaches a predefined limit. The limit price therefore acts as a target price which the investors is willing to pay or receive. Limit orders can be useful to restrict the minimum selling price or the maximum purchase price of an order. The order will only be filled at the specified price or a better one.

What Is The Difference Between A Buy And Sell Limit Order?

Like a market order limit orders can be buy or sell orders. A buy limit order will initiate the transaction only at or below the predefined limit price. Similarly, a sell limit order will only be executed at or above the limit price. Therefore the limit price acts as a restriction of the maximum price to be paid or the minimum price to be received.

Is The Execution Of A Limit Order Guaranteed?

If the current market price does not reach the limit the order will not be filled. However even if the specified price is being reached there might be too many orders in the queue of the brokerage to execute it. Therefore the execution of a limit order is not guaranteed, even if the limit price is reached.

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Stop Orders

What Is A Stop Order?

A stock market chart showing a stop order being converted to a market order.
Stop orders are being converted to market orders at the specified price.

A stop order is a special order which is being converted to a market order once the current price reaches a specific stop price. Once the stop price is reached the order is being executed at the next available price. In case the stop price is never reached the order will never be executed.

Stop orders, like any other stock order type, can be executed as both buy or sell orders. A buy stop order is being converted to a market order when the current market price is above the stop price. Contrary, a sell stop order is being converted to a market order when the current market price is below the stop price.

What Is The Difference Between Stop And Limit Orders?

The difference between stop and limit orders might be confusing at first. A limit order represents a single order which gets executed only at or above the specific limit. Contrary a stop order will be converted into a market order once the trigger price is reached. This market order is then executed regardless of the current share price.

What Is A Stop-Loss Order?

The characteristics of stop orders make them ideal for investors to prevent losses. They help them to ensure that a stock is sold as soon as possible once the current price has fallen below the specified stop limit. This reduces the potential for losses as there is no constant monitoring of the stock price necessary. As a result the stop order is also often referred to as a stop-loss order.

What Is A Trailing Stop-Loss Order?

A regular stop order sets a fixed price at which the order should be converted. Contrary, a trailing stop does not set a fixed price but a certain percentage from the current market price. This percentage only applies to decreases in share prices. If the share price increases instead the stop price will too in order to maintain the percentage threshold. Once this trailing stop is reached the order will be converted to a market order.

For example, a ten percent trailing stop-loss order with a current market price of €50 would be triggered if the share price falls to €45. However if the share price increases to €60 the trailing stop-loss order would now be triggered at €54 (a 10% drop from €60).

What Is A Stop-Limit Order?

A stop-limit order combines the characteristics of a stop order and a limit order. Like a regular stop order the stop-limit will be converted to a different order once the stop price is reached. However unlike regular stop orders the order will be converted to a limit order rather than a market order. This limit order will then be specified at the specified price or better.

Investors choose to use stop-limit orders in order to better control the price at which the order will be executed. They also can better control the risk of triggering a regular stop order due to short-term price fluctuations as they have a second limit set to prevent selling at a loss.

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