All trades consist of at least two orders to make a complete trade: One person places an order to buy a security, while another places an order to sell that same security. Order types are the same whether trading stocks, currencies, or futures.
Traders have access to many different types of orders they can use in various combinations to make trades. The main order types are explained below, along with some common ways they may be used in trading.
- Market orders execute the most quickly, but they do not guarantee particular execution prices.
- Limit orders guarantee specific prices for orders, but they won't execute at all if the prices don't reach the initial limit threshold.
- Stop orders, also known as "stop-losses," attempt to mitigate losses by triggering a market order if your position moves too far against you.
- These three basic order types can be combined to create more complex orders, such as stop-limit and market-if-touched.
The Basics of Placing Orders
A single order is either a buy order or a sell order, and that will have to be specified regardless of the type of order being placed. Every order type detailed below can be used to buy and sell securities. Both buy orders and sell orders can be used either to enter or exit a trade. If a trade is entered with a buy order, then it will be exited with a sell order. If a trade is entered with a sell order, the position will be exited with a buy order.
For example, the simplest trade occurs when a trader expects a stock price to go up. That trader places one buy order to enter the trade, and one sell order to exit the trade. Hopefully, the stock price has increased in the time between those two orders, so the trader makes a profit when they sell.
Alternatively, if a trader expects a stock price to go down, they would place one sell order to enter the trade and one buy order to exit the trade. This is more commonly known as "shorting" or "shorting a stock"—the stock is sold first, then bought back later.
Market Orders (MKT)
Market orders buy or sell at the current price, whatever that price may be. In an active market, market orders will execute immediately but not necessarily at the exact price that the trader intended.
For example, a trader might place a market order to buy a stock when the best price is $129, but the order might be for a popular stock that sees millions of shares change hands every day. In the seconds between the time an order is placed and the time it executes, the price could increase to $129.50. The trader who placed a market order would then pay more for the stock. When the price moves in an unfavorable direction after placing a market order, it's called "slippage."
Market orders are used when you want your order to be processed as quickly as possible, and you're willing to risk getting a slightly different price from your ideal. If you are buying, your market order will get filled at the "ask" price, as that is the price that someone else is currently willing to sell for. If you are selling, your market order will get filled at the "bid" price, as that is the price that someone else is currently willing to pay.
Limit Orders (LMT)
Limit orders are orders to buy or sell an asset at a specific price or better. They may or may not get filled, depending on how the market is moving and where a trader sets the limit price. However, if they do get filled, it will always be at the price a trader expects (or at a better price than expected). Limit orders are used when you want to make sure that you get a suitable price, and you're willing to risk the order not being filled at all.
"Better" depends on whether the order is a buy or sell order. For example, if a trader places a limit buy order with a price of $50.50, the order would only get filled if the stock could be purchased for $50.50 or less. If your brokerage can't find someone willing to sell that stock to you for $50.50 or less, then the order won't execute.
On the other hand, if you wanted to sell a stock for $50.50 or more, you would place a limit sell order and set the price at $50.50. The order would only be executed if someone else were willing to buy the stock from you for at least $50.50.
Stop Orders (STP)
Stop orders are similar to market orders; they are orders to buy or sell an asset at the best available price. However, these orders are only processed if the market reaches a specific price. That price is set in the opposite direction a trader hopes the stock will go, so this type of order is used as a way of limiting losses. That's why you'll often hear them referred to as "stop-loss" orders.
For a buy order, the stop price must be above the current price. For a sell order, the stop price must be below the current price.
For example, if you own a stock that's currently worth $12.57, you might place a stop order to sell with a price of $12.50. If the stock price dips down to $12.50 or lower, your stop order becomes a market order to sell, and you'll automatically sell the stock for the best price available at that moment. If the price doesn't dip down to $12.50, then nothing happens.
Beginner traders may only place stop orders to sell, but once traders begin shorting stocks, that's when stop orders to buy become useful. Traders who short a stock want the price to drop, but to protect themselves from a sudden spike in price, they may set a stop order to sell just above the price where they shorted the stock.
Remember, shorting a stock means selling it first, then buying it later to close a position (hopefully, after the price has fallen). A trader who shorts a stock at $50.75 may place a stop order to buy at $60. That way, they'll automatically get out of a bad trade once they've lost $0.25 per share.
Stop-Limit Orders (STPLMT)
Traders will commonly combine a stop order and a limit order to fine-tune what price they get. Stop-limit orders work the same way as stop orders, except they automatically become limit orders when the target prices are hit, rather than market orders.
Like a standard limit order, stop-limit orders ensure a specific price for a trader, but they won't guarantee that the order executes.
When using a stop-limit order, the stop and limit prices of the order can be different. For example, a trader placing a stop-limit sell order can set the stop price at $50 and the limit price at $49.50. In this scenario, the stop-limit sell order would automatically become a limit order once the stock dropped to $50, but the trader's shares wouldn't be sold unless they could secure a price of $49.50 or better.
Trailing Stop Orders
Both stop orders and stop-limit orders can be set at a specific price, or they can be set in relation to the market price. When a stop or stop-limit order fluctuates with the market price, that's a trailing stop order (or trailing stop-limit order). Traders use this strategy to protect their profits.
For example, a trader may buy a stock for $50. A week later, the stock price may rise to $53. That trader may set a trailing stop order to sell that's set $2 below the market price. If the stock price dropped to $51 the next day, the trailing stop order would become a market order to sell, locking in some profit for the trader. However, if the stock price increased to $55 the next day, the trailing stop order trigger would increase to $53.
The trigger price for trailing stop orders can be determined by dollar amount or percentage, but it will always be relative to the market price.
Market-if-Touched (MIT) Orders
Market-if-touched (MIT) orders are similar to limit orders, except they don't guarantee a price. That helps them execute more quickly, while still allowing investors to set target prices rather than buying at the current market price. The trader sets a price, and if that price is hit, the MIT order will become a market order.
For example, suppose a trader wants to buy a stock that's currently trading at $70, but they don't want to pay that much. They may place an MIT buy order with a target price of $60. If the stock price falls to $60, the MIT order will become a market order, and the trader will buy the stock.
As with a standard market order, there is a risk of slippage with MIT orders. MIT orders only give traders the ability to control the price at which a market order is triggered.
Limit-if-Touched (LIT) Orders
A limit-if-touched (LIT) order is like an MIT order, but it sends out a limit order instead of a market order. LIT orders are different from standard limit orders because the trader can set both the trigger price and the limit price.
For example, suppose a stock is trading at $16.50. A LIT buy order trigger could be placed at $16.40, and a limit price could be set at $16.35. If the price moves to $16.40 or below (the trigger price), then a limit order will be placed at $16.35. Since it is a limit order, shares will only be bought for $16.35 or less. If there isn't anyone willing to sell you shares for $16.35 or less, then your buy order won't execute, even though the LIT trigger price was reached.
The Bottom Line
A market order is used to enter or exit a position quickly. This is the quickest way to fill an order, but it gives you the least control over the price. A limit order, on the other hand, ensures minimum selling prices and maximum buying prices, but it won't execute as quickly.
Stop orders are used to limit your losses with a market order when a trade turns against you. Stop-limit orders employ the same tactics, but they use limit orders instead of market orders. Trailing stop orders and trailing stop-limit orders use the same strategy to protect profits.
Market-if-touched orders trigger market orders if a certain price is touched. Limit-if-touched orders send out limit orders if a specific trigger price is reached.
Frequently Asked Questions (FAQs)
How do I choose which order type to use?
Experienced traders will use many—if not all—of the order types discussed here. Knowing when to use each depends on your trading strategy and position type. For example, if a stock you own is going down rapidly, and your only goal is to exit your position as quickly as possible, then you'll probably use a market order. If you are holding a stock for the long term, but you want to protect against the stock going down, then you may want to use a stop-loss order. If you have a specific profit target in mind, you may use a limit order to automatically take profit at that price.
Why do stock exchanges create so many order types?
Brokerages, not the stock exchanges, create and control order types. Essentially, brokerages offer all these order types to best serve the customer. More order types provide more options for how to trade securities. If you are a new trader and looking for a brokerage, and two brokerages are equal in all ways except that one offers more order types, you'll probably choose the one that gives you more options.