9 Stock Order Types You Need to Know About
When you start trading stocks and other instruments, you’ll find out quickly that there are many ways to place an order -- almost too many.
Each order type has its own advantages and disadvantages, and it's important to understand how they work before you start trading with real money.
In this post, we will explore the different types of stock orders, their pros and cons, and when each one makes sense.
We’ll start with the simplest order type of them all:
A market order is an order to buy or sell a stock at the current market price. When you place a market order, you are essentially telling your broker to execute the trade right now at the best available price. You may not know exactly what price you will pay or receive until the trade is executed.
Assume Nvidia (NVDA) is trading at $445.38 and you place a market order.
You will most likely get filled (meaning the order is completed) at $445.38, but your official entry price may be slightly higher or lower.
Pros of Market Orders:
- Quick execution: Market orders are executed immediately for liquid stocks and ETFs, which means you can get in and out of a trade quickly. You also don’t have to do any thinking,
- Guaranteed execution: Market orders are guaranteed to be executed, as long as there is sufficient volume in the market.
Cons of Market Orders:
- Lack of control over price: Because market orders are executed at the best available price, you have no control over the exact price at which the trade will be completed.
- Risk of price fluctuations: If the price of the stock changes rapidly between the time you place the order and the time it is executed, you may end up paying more or receiving less than you anticipated. This is especially true with less-liquid stocks and ETFs.
- Can’t be used after hours: Most brokers do not allow market orders in extended hours trading, which is probably a good thing because stocks can be extraordinarily volatile after hours.
When to Use a Market Order
A market order is best used when you need to get in or out of a trade quickly, and price is not your primary concern. Market orders are commonly used by long-term investors and beginning traders. However, some advanced traders will use market orders when time is of the essence.
A limit order is an order to buy or sell a stock at a specific price or better. When you place a limit order, you are essentially telling your broker to execute the trade only if the stock reaches your specified price or better.
Say JP Morgan (JPM) is trading at $153.55.
If you place a limit order to buy at $153.50, your order will only be filled if the stock declines to $153.50 or lower.
And if you wanted to sell JP Morgan at $153.60, your limit order would only be filled if the stock rose to $153.60 or higher.
Pros of Limit Orders:
- Control over price: With a limit order, you have control over the price at which the trade is executed. This is critical to many sophisticated traders.
- Protection against price fluctuations: By setting a specific price, you can protect yourself against sudden price fluctuations.
- Flexibility: Limit orders can be used to open or close a position, and can be canceled or modified at any time.
Cons of Limit Orders:
- Execution is not guaranteed: if the stock does not reach your specified price, the trade will not be executed. In the JP Morgan (JPM) example above, the stock could rally $20 and you would miss it because you wanted to buy 5 cents lower.
- Slow execution: Because limit orders are executed only when the stock reaches your specified price, they may take longer to execute than market orders.
When to use a limit order:
A limit order is best used when you want to control the price at which the trade is executed, and you are willing to wait for the stock to reach your specified price.
A stop order is an order to buy (a buy stop order) or sell (a sell stop order) a stock once it drops to a specific price, known as the stop price.
When the stop price is reached, the stop order is triggered and you buy/sell the stock with a market order.
Let’s use Tesla (TSLA) as an example. Say the stock is trading at $233.50 and you want to buy it lower. So you could place a buy stop order at $230.
And if the stock declined to $230, a market order would be fired off and you would get filled around $230.
On the flip side, say you’re long Tesla and want to get out if it drops to $230. If you set a sell stop order at $230, a market order to sell would be executed if Tesla hit that price.
Pros of Stop Orders:
- Quick execution & high convenience: Once the stop price is reached, the stop order becomes a market order and is executed immediately. If you were manually monitoring the stock and placing the order, you may not get it done in time.
Cons of Stop Orders:
- Risk of price slippage: Because stop orders become market orders once the stop price is reached, you may receive a worse-than-anticipated price, especially in a volatile market
Stop Limit Orders
A stop-limit order is a type of order that combines a stop order and a limit order.
It is used to buy or sell a stock once it hits a specified price (the stop price), but only at a specified price or better (the limit price).
It’s like the Stop Order you read about, but it uses a limit order for the buying/selling portion of the trade.
Assume Apple (AAPL) is trading at $178.80. You may decide that it would be very attractive at $175.
So you could set up a stop limit order where if Apple hits $175, a limit order is entered to buy 1,000 shares at $175.05.
Or let’s say you want to sell Apple at a higher price. You could set a stop limit order where if Apple hits $180, a limit order is entered to sell at $179.90.
Pros of stop-limit orders:
- Certainty: The limit part of the order lets you know exactly where the trade will be executed
- Saved time: once the stop price is hit, your limit order goes to work right away.
- Can limit losses: a stop-limit can minimize losses
Cons of stop-limit orders:
- You may not get filled: there is no guaranteed your limit order will be filled at your specified price.
- Complexity: it’s simpler to just put a plain-vanilla limit order where you want to buy or sell
When to use a stop-limit order:
A stop-limit order is great if you want to protect yourself from losses in a volatile market. It can also be used to lock in profits on a trade. However, it is not common because most traders just use a plain-vanilla limit order when they want to buy or sell at specific prices.
A market-on-close order is an order that is executed at the closing price of a security.
Say you own Microsoft (MSFT), and while the stock is trending higher intraday, you do not want to stay long into its earnings report.
You could use a market-on-close order to sell the stock right at the close. So if the stock closed at $315.55, that would be your exit price.
You can also use market-on-close orders to buy.
Pros of a market-on-close order:
- Convenience: you do not have to be in front of your trading platform to place the trade. This is helpful if for some reason you want to be in or out of a certain position on a certain date, and you don’t trust yourself to get the trade done.
Cons of a market-on-close order:
- Lack of control over price: Because market-on-close orders are executed at the closing price, you have no control over the exact price at which the trade will be executed.
- Risk of big intraday moves: if a stock gaps intraday, or makes a big surprise move, you may end up paying more or receiving less than you anticipated.
When to use a market-on-close order:
Market-on-close orders are not very popular, but they are a good tool to use if you want to guarantee that your order will be executed at the closing price of a security if you have some kind of time-based deadline for a trade. They can also be valuable for quantitative or automated trading strategies which require you to take closing prices. For example, Sami Abusaad uses market-on-close orders for his Earnings Play strategy.
Be aware that not all brokers allow market-on-close orders, so check with yours.
Now let’s talk about four other order types which are technically enhancements to other types of orders.
A day order is an order that expires at the end of the day you enter it. Any of the order types listed above (aside from market-on-close) can be a day order.
On most trading platforms, all orders are day orders by default. (check yours to be sure)
Say Shopify (SHOP) is trading at $55.40, and you enter a day limit order at $55.10.
If Shopify does not hit $55.10 to fill your limit order by the end of the trading day, it will be canceled.
Pros of Day Orders:
Simplicity: you don’t have to reexamine your entry/exit prices each day
Cons of Day Orders
There are no real cons of day orders - they are more of a preference.
When to Use a Day Order
Use a day order when you want a trade done today only. And again, most platforms default to Day Orders.
Good ‘Til Cancelled Orders
A Good ‘Til Cancelled Order (or GTC order) stays in place until you cancel it. A GTC order is almost always a limit order. (though not all limit orders are GTC orders) This is because market orders are executed in seconds.
Let’s take Shopify again. You enter a GTC limit order to buy at $55.10. That order will stay in place until you physically cancel it. So 3 weeks from now, if Shopify hits your limit price of $55.10, you will be filled at that price.
Pros of GTC Orders:
Convenience: you don’t have to worry about decision-making later. You can set your trades and forget them.
Cons of GTC Orders
Risk of market gaps: if a stock gaps between GTC order and the time it is executed, you may end up paying more or receiving less than you anticipated.
You might forget: you may change your opinion on a stock, and forget your GTC order is in place. Yes, it happens!
When to Use a GTC Order
You are comfortable with the risk of letting your order sit out indefinitely.
Fill or Kill Orders
A fill or kill (FOK) order specifies that you get filled on the entire trade, or nothing at all.
Imagine you are trying to buy 1,000 shares of Unity Software at $35. If your broker can only fill you on 800 shares at $35, the order will be killed.
Pros of Fill or Kill Orders
Certainty of execution: A fill or kill (FOK) order guarantees that your entire order will be executed at the specified price or better, the way you want. This is useful if you take an all-or-nothing approach to your trades.
Reduced risk of slippage: Slippage is the difference between the price you expect to pay or receive for a security and the price you actually pay or receive. With a FOK order, you are less likely to experience slippage because your order will only be executed if there are enough shares available at the specified price.
Cons of Fill or Kill Orders
Limited liquidity in Some Cases: FOK orders can be difficult to execute in illiquid stocks (and more so with options), where there are not enough shares available at the specified price.
Risk of Missing Out: If the market moves quickly and the specified price is not reached, your order may be canceled and you may miss out on the trade. Getting filled on half your trade may still result in a profitable trade.
When to Use a Fill or Kill Order
You should use a Fill or Kill Order when you absolutely need an all-or-nothing transaction.
Conditional orders are more complex orders involving multiple factors, and are mostly used by advanced traders.
Technically speaking, stop, limit, and stop-limit orders are conditional order types.
But many brokers allow for very complex conditional orders using all sorts of variables, depending upon your particular broker.
For example, you could program your platform to follow instructions like this:
- If Wal-Mart (WMT) falls to $150, enter a limit order to buy 100 WMT October $150 calls at $5
- If the VIX falls to $15, enter a market order to buy 1,000 QQQ October $350 puts
A common Conditional Order (outside stop, limit, and stop-limit) orders type is the one-triggers-the-other (OTO) order.
This is when you have a primary order, that when executed, sets off a secondary order.
- If Netflix (NFLX) falls to $400, enter a market order to buy 100 shares. That’s the Primary Order. And once that is filled, set a stop order at $395, which would be the secondary order.
There is a related order type called the One-Cancels-the-Other (OCO).
This is when you have 2 orders ready to go. And if one is executed, the other is canceled.
Say you are long IWM with the ETF trading at $188. You could have a stop loss order to sell at $180, and another to sell if it hits $205.
Pros of Conditional Orders
- Flexibility: You can trade what you want, exactly how you want to, based on an endless series of variables
Cons of Conditional Orders
- Risk of Error: the more complex a trade, the more likely you are to make a mistake entering it. So double-check your orders before you get them in!
Now you know about the major order types. Want to take your trading knowledge to the next level? Then download Scott Redler's Moving Averages eBook: