Before making your first trade, it’s important to understand the different stock order types. Here’s a rundown of the three basic types: the market order, the stop order, and the limit order.
There are many stock order types, but the three basic ones to know are the market order, stop order, and limit order
What’s in a stock order? Just about everything. Think of it as your gateway from idea to action. It’s where the rubber meets the road, where you pull the proverbial trigger, where a potential market opportunity gets real. If you’re a trader or a self-directed investor, you’ll likely be placing many buy and sell orders over the course of your investing career. So you’ll want to make sure you do it correctly. Ideally, you’ll nail it every time. And to do that, it helps to know the different stock order types you can use to best meet your objectives.
Here’s an overview of the basic stock order types, their variations, and the different situations in which each one might come in handy. There are three basic stock orders:
It’s important to understand the difference between each one and know how to use these stock orders. Not only do they each present a different route toward entering or exiting the market, but knowing which “door” to enter (or exit) can also help prevent you from making certain mistakes that are avoidable and potentially costly.
A market order allows you to buy or sell shares at the next available price. If you’re placing a market order to buy, you’ll get filled at the next available “ask” or selling price (sometimes called the “offer”). If you’re using it to sell (or sell short), you’ll likely get filled at the next available “bid” or buying price. Typically, you’d use market orders when you need to get in or out of your position quickly. Remember: Market orders are all about immediacy.
Caveat: A market order may be fast and efficient, but that doesn’t necessarily mean your fill price will be favorable—and not necessarily the same price you see on your screen when you hit Send. You’re likely to get filled within a range near your target price—sometimes closer; other times further from your preferred price. This is called slippage, and its severity can depend on several factors.
For example, thinly traded stocks may have wider distances between bid and ask prices, making them susceptible to greater slippage. Similarly, periods of high market volatility (such as during an earnings release or major market event) can cause bids and asks to fluctuate wildly, increasing the likelihood for slippage.
Not all trading situations require market orders. There are other basic order types—namely, stop orders and limit orders—that can help you be more targeted when entering or exiting the markets.
The stop order (sometimes called a “stop-loss”) allows you to enter or exit a position once it reaches a specific price level. Once your activation price is reached, the stop order turns into a market order, filling at the next available ask price (in the case of a buy stop order) or next available bid price (in the case of a sell stop order).
Confused? Here are a few examples.
Find your best fit.
The limit order essentially says, “I want to buy or sell a stock at a specific price or better.” (You can also use a limit order to initiate or close a position.) Many investors understand the “at a specific price” part but get confused by the “or better” part.
Because the stock order is typically the very first step you take when placing a live trade, it should be done carefully and accurately. Knowing which stock order types is key when entering and exiting the markets.
If you’re new to the world of self-directed online investing, you might consider practicing in a simulated trading environment such as the paperMoney® stock market simulator on the thinkorswim® trading platform.
All investing involves risk including the possible loss of principal.
The risk of loss on a short sale is potentially unlimited since there is no limit to the price increase of a security. There is no guarantee the brokerage firm can continue to maintain a short position for an unlimited time period. Your position may be closed out by the firm without regard to your profit or loss.
Want to learn more about basic stock order types? Watch this short video:
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