The Various Stock Order Types

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There are four main order types:

  1. Market Order.
  2. Limit Order.
  3. Stop Loss Order.
  4. Stop Limit Order.

The Market Order 

The market order is probably the first one that an investor learns. This type of order says to buy or sell securities at the next available price (also known as the market price). A market order remains in effect only for the day.

In some brokerage platforms, an investor can specify “On the Open” or “On the Close."

  • “On the Open” means the order will be executed as close to the market open time as possible.
  • “On the Close” means the order will be executed as close to the market close time as possible.

If an investor puts in a day market order to buy 10 shares of Apple (AAPL), the order will buy 10 shares as soon as 10 shares are available at whatever price Apple stock happens to be trading. This type of order gets filled the fastest — nearly immediately. The trade-off is that it may not be at the best price.

One can say that a market order guarantees that the order gets filled, but it does not guarantee at what price. For a well-known and heavily traded stock like Apple, this is not going to be a problem, because it is likely to be filled at a fair market price. When a security has a large volume of buyers and sellers and is heavily traded, we say it is highly liquid.

The “bid” price is the highest price a buyer is willing to buy at. The “ask” price is the lowest price a seller is willing to sell at. Therefore the bid price is lower than the ask price. When a security is liquid, the bid price and the sell price is going to be fairly close together — we say that the bid/ask spread is narrow.

The bid/ask spread of AAPL during market hours is about a penny. When a security or the market becomes more volatile, the bid/ask spread becomes wider. In those cases, market orders have increased risk because large and rapid price changes could result in the order being placed at a poor price, or possibly at a price that exceeds available funds.

In such cases, a limit order may be a better alternative.

The Limit Order 

The limit order allows an investor to set the price at which the order is filled. This type of order is not guaranteed to get filled. But if it is filled, this order guarantees that the order is filled at the price specified or better.

A buy limit order is used by an investor who wants to buy a security. The investor sets a limit price. This is the maximum price that the investor is willing to buy at. The order will only get filled if the price is at or below that price.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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