Are you tired of missing out on great investment opportunities in the stock market? Do you want to make informed investment decisions that align with your goals and risk tolerance? Then understanding the different types of stock orders is essential. In the stock market, orders are used to buy and sell stocks, helping you navigate the stock market confidently.
Table of contents
- What is a Stock Order?
- What Are the 4 Types of Stock Purchase Orders?
- What is Market Order vs Limit Order vs Stop Order?
- What are the Advance Types of Stock Orders?
In this article, we will explore the most common types of stock orders. From market orders to limit orders, and stop-loss orders to buy-stop orders with real-life examples. If you’re ready to take the stock market by storm, keep reading!
What is a Stock Order?
A stock order is a request by an investor to buy or sell a specified quantity of a particular stock at a certain price. It is an instruction to a broker or an online trading platform to execute a trade on behalf of the investor.
The various types of stock orders possess unique features and functionalities. They allow investors to set specific conditions and parameters for their trades. Additionally, the type of stock order used depends on some factors. These factors include the investor’s objectives, trading strategy, and risk tolerance.
What Types of Stock Orders Are There?
There are different types of stock orders that investors can use to sell or buy stocks in the stock market. The main ones include market orders, limit orders, stop-loss orders, and buy-stop orders. Each type of stock order has it’s own parameters which investors can manipulate to achieve their objectives. There are also some advanced stock orders like Good-Til-Cancelled (GTC) and One-Cancels-the-Other (OCO) orders.
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What Are the 4 Types of Stock Purchase Orders?
The 4 types of stock purchase orders include market orders, limit orders, stop loss orders, and buy-stop stop orders, as we saw above. Let’s examine these types of stock orders in detail below.
1. Market Order
A market order is a type of stock order that allows you to buy or sell a stock immediately. This order executes at the best available price in the market.
When you use a market order to buy or sell stocks, you are telling your broker to execute the trade immediately at the current market price. It is the simplest and most common type of stock order used by investors.
A market order is like shopping at a store and paying the full price for an item. This type of order is best used for big company stocks and exchange-traded funds, which can be traded quickly and at a price that is close to what you expect.
A Real-World Example of Market Order
Let’s say an investor wants to buy 50 shares of Nike, the popular athletic clothing and footwear company. They contact their broker with a market order at 2 p.m. during Canadian market hours. At that time, Nike’s stock price is $120, which is lower than the previous day’s closing price of $122. The broker can quickly execute the trade, and the investor buys the shares at $120.25 each, which is very close to the current market price.
2. Limit Order
A limit order is a type of stock order that allows you to set a specific minimum price to sell or a maximum price to purchase a stock. This means that the trade will only execute if the stock achieves the specified price level or better.
A limit order helps investors avoid buying or selling stocks at a cost they don’t want. With a limit order, you can set a specific price to buy or sell a stock. If the stock’s price doesn’t attain the specified price level, the trade won’t execute.
There are two particular types of limit orders. One is a buy-limit order and the other is a sell-limit order. This type of order allows investors to avoid unforeseen price changes in the market.
How Limit Order Works in Real-Life Scenarios
For instance, if you want to buy shares of a business, you can set a limit order to buy them at a price no higher than $60. Currently, the share price is $65, which is too high for your liking as an investor. If the stock’s price falls to $60 or below, your order will execute.
Likewise, if you want to sell your shares, you can set a limit order to sell them at a price no lower than $75. If the stock’s price rises to $75 or above, your order will be implemented. Limit orders can be beneficial for investors who want to control the price at which they buy or sell a stock. It can also help them avoid unexpected price changes in the market.
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3. Stop Loss Order
A stop order is a type of trade order that helps investors to reduce their potential losses on a stock. It’s also called commonly referred to as a stop-loss order.
With a stop order, you set an exact price at which you want to sell the stock. If the stock’s price falls to that level or below, the trade will be carried out, helping you reduce your losses.
This type of order is usually used with long positions, but it can also be used with short positions. In this case, the stock will be bought if it arrives at the stop order price or higher.
A Real-Life Example of Stop Loss Order
Let’s say an investor owns some shares of the Tesla company that are currently trading at $13 per share. The investor believes that if the stock’s price falls to $7, it may be time to sell their shares to reduce their potential losses. To achieve this, the investor can set a stop order at $7. This means that if the stock’s price falls to $7 or below, the order will be executed and the investor’s shares will be sold automatically.
4. Buy Stop Order
A buy stop is a unique type of stock order that falls under the category of stop orders. A stop order is an order to buy or sell a stock once it reaches a certain price level, as we saw above.
This means that a buy-stop order will only be executed if the stock’s price rises to the specified price or higher. On the other hand, a sell-stop order will only be executed if the stock’s price falls to the specified price or lower.
The buy-stop order is used to take advantage of a potential upward trend in the stock’s price. The investor doesn’t have to constantly monitor the market and manually execute the trade.
A Real-Life Demonstration of Buy-Stop Order
Let’s say an investor is interested in buying shares of a company, but only if the stock’s price starts to rise. The current market price for the stock is $50 per share. However, the investor sets a buy-stop order at $55 per share. Having the belief that if the price rises to that level, it may indicate that the stock is on an upward trend.
If the stock’s price starts to rise and reaches $55 or higher, the buy-stop order will be triggered and the trade will be executed automatically. This means that the investor will buy the shares at the market price. Whereas, this market price could be higher or lower than $55 per share, depending on the demand and supply of the stock at that moment.
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What is Market Order vs Limit Order vs Stop Order?
The clear difference between these three orders is that market orders are used when you want to execute a trade quickly. Limit orders are used when you have a specific price in mind and want to control the price at which you buy or sell a stock. A limit order tells your broker to buy or sell a stock at a certain price or better, and everyone in the market can see it. On the other hand, a stop order is private and will only turn into a market order when the stock reaches a certain price that you set beforehand.
As you can see, market orders, limit orders and stop orders all have their own objectives and utility. Let’s take a closer look at the pros and cons of each below.
Market Order: Advantages
- Easy to set up as no price is specified.
- Almost always filled as the trade executes at the current market price.
- It has no expiration since it usually fills immediately.
Market Order: Disadvantages
- May not provide price control for volatile investments.
- Does not guarantee a specific price for the order.
Limit Order: Advantages
- Provides price control by specifying the price at which the order will trigger.
- May be suitable for stable investments.
- Can be used to take advantage of fluctuations in the market.
Limit Order: Disadvantages
- May not get filled if the market does not reach the specified price.
- Usually comes with an expiration date.
- May not be suitable for highly volatile investments.
Stop Order: Advantages
- No need to monitor how a stock is performing daily.
- Removes emotional bias from investing decisions.
- Limits loss from an investor’s portfolio and position.
Stop Order: Disadvantages
- Short term fluctuations in the market can trigger a stop order.
- Certain securities do not allow for stop orders.
- Not ideal for fast, rapidly changing markets.
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What are the Advance Types of Stock Orders?
As a stock trader, you might also want to consider the advanced types of stock orders. They are available for experienced traders to fine-tune their trade entries and exits. Once you’ve mastered the basic four types of stock orders above, you may want to try your hand with more advanced orders.
There are two categories of advanced orders. The first one happens only when something special happens (conditional). And the other one has to happen before a certain time (durational). Some examples of advanced stock orders include:
1. One-Cancels-Other Order (OCO)
An OCO order is a conditional order in which two orders are placed, and one order is canceled when the other order is filled. For example, a trader may set an OCO order consisting of a sell limit order at $50 and a sell stop order at $39.
2. Bracket Order
This is a type of stock order that immediately sets an OCO to take profit and a stop order once a position is opened. For instance, if you enter a long position, a bracket order will immediately place an OCO sell limit and sell stop.
3. Stop Limit Order
The stop limit order is an order that allows traders to define a price range for execution. It is a type of stock order that specifies the price at which an order is to be triggered and the limit price at which the order should be executed.
4. Good ‘Til Canceled (GTC)
A GTC order is a type of order that stays active until you decide to cancel it. You can use this order to set a specific amount of time for other types of orders to remain active. A GTC order means to keep the order active until the trader cancels it.
5. Trailing Stop Order
A trailing stop order provides a means to automatically move or “trail” stops (basic stop orders). This is a kind of exit plan that moves with the price.
Understanding the types of stock orders is crucial for successful trading. It helps you to optimize your trading strategy, minimize risks, and maximize profits in the world of stock trading. Make sure to evaluate your goals and choose the appropriate order type to meet them. Keep in mind that market conditions can change rapidly, so be prepared to adjust your orders accordingly. Happy trading!