A Primer On Orders

I talk to a lot of new traders who have a decent amount of understanding of the market and how trading works. These are people who know the difference between penny stocks and stocks listed on OTC markets. They have pretty good grasp of things that even seasoned traders have a hard time getting a grasp of, like Bitcoin. 

While that comes with some benefits and some drawbacks, one of the biggest knowledge gaps I find between new and experienced traders comes from order types. Beyond regular market orders, most have limited, or no, knowledge of any other way to buy and sell stock.

In the interest of changing that, I’ve put together brief descriptions for a few of the most common order types.

Market Order

As I mentioned, market orders are generally the beginning and end of most new traders’ order usage. A market order’s sole function is to purchase or sell a stock as quickly as possible, whatever the price.

Once a market order is placed, the broker will execute the trade for the desired amount of shares at the best available price. In the case of market order, speed is the priority.

Limit Order

On the other hand, in instances when price takes precedence, you can use limit orders. Essentially, limit orders are standing requests to buy or sell shares of a stock at a specified price or better — lower for buy orders, higher for sell orders.

When buying or selling stocks, limit orders can serve as a surefire way to enter into or exit from a position without the need to constantly monitor the stock, as long as the stock reaches that price and there are enough shares available. If the stock doesn’t reach the limit it will remain open until it’s cancelled by either you or your broker.

Another contingency you should be aware when placing limit orders is the probability of a partial fill. These occur in instances when there are not enough available shares to complete a limit order before the price recedes from the limit, so the broker executes the trade with as many shares it can locate. If you’ve decided that you only want to be filled completely or not at all, you can opt to exclude partial fills with you broker.

Stop-Loss Order

Stop-loss orders are similar to limit orders in that they both require the stock to reach a specified price before shares are bought or sold. Once the share price crosses the stop, the order becomes a regular market order. So regardless of what the price does after passing the stop, the order will be executed.

Stop orders are used by traders who want to ensure a certain profit level from their trades. In the case of sell-stop orders, you might place them between their entry and the current market price so that they are guaranteed to profit from the difference. Likewise, buy-stop orders can be placed on short position trades below the price you borrowed at and above the stock’s current market price.

Stop-Limit Order

Stop-limit orders function exactly like stop-loss orders but, instead of becoming a market order once the stop is passed, they become limit orders. This means that you have to set two price points on stop-limits, the initial stop level at which point it becomes a limit order, then the level at which the limit order will execute.

Traders who use stop-limit orders are looking for certainty about the price at which they will be entering or exiting a position. Like with all limit orders, price is paramount, while speed is secondary. In this case, the stop exists as a means of providing an extra barrier before a stock is able to execute.

Timed Orders

There are a number of other order types that can be tailored to be active for only a specified time, like a single trading day, like a day order, before they are cancelled.

Two of the timed order types most frequently used by active traders are immediate-or-cancel and fill-or-kill orders. They are both active only in the moment the order is placed and, if they can’t be executed at a particular price in that moment, they are cancelled. The main difference between the two is that FOK orders must be filled entirely, while IOC orders can be partially filled.

Disclosure: Warrior Trading is an editorial partner of Benzinga.