Trade Orders: Definition & Types

Instructor: Christopher Owens

Chris has over 13 years of experience in the financial services industry and is a CERTIFIED FINANCIAL PLANNER professional

So you've decided to trade stocks...now what? In this lesson we will identify and describe the different types of trade orders: market, limit and stop. The one you choose will depend on the investors goals and objectives.

Implementing Investments

Jan has opened a brokerage account and deposited $5,000 to invest in the stock market. Her goal is to accumulate money for retirement. She has studied various investment options and decided to invest some of her money in XYZ company's stock.

Now what? How does Jan go about actually investing money in company stock? Well, there are three basic types of orders known as market, limit and stop orders. Let's go into these in more detail.

Summary of the different order types
Order Types

Market Order

A market order is an order to buy or sell stock at the current market price. It is the quickest and easiest way to trade stocks. When placing a market order, the order is filled at the current market price of the security and will usually be executed immediately. Because of the speed of order execution, the buyer and seller can be sure the price of the security at the time of the transaction will be close to the quoted price at the time the order was placed.

Limit Order

A limit order is an order to buy or sell stock at a specific market price. This type is order is placed using a price at or below the current market price when buying a stock and at or above a specific price when selling. The order will not be executed until the market price of the stock rises or falls to the specified price.

Investors are able to place limit orders using one of three forms:

  • Fill or Kill, which is cancelled if not immediately executed.
  • Day Order, which is only good for the current trading day and will then be cancelled.
  • Good Til Cancelled, which remains open (usually for 6 months) until the investor cancels the order.

Example

Say Jan enters a Day Order to buy 100 shares of XYZ stock using a limit price of $10.50. The current market price is $11. Jan knows its best to buy low and sell high, so she wants to only buy this stock if it falls to a reasonable price.

Later that day, the market price falls to the price specified in the order ($10.50) and the order will be executed. Since she entered a Day Order, had the price remained the same or went higher, the order would have been cancelled at the end of the trading day.

Stop Order

In a stop order the investor only wants to buy or sell a stock when its market price hits a certain price. Once that price is reached, the order turns into a market order and will be executed at the next available market price.

The execution price will be very similar to the price entered in the transaction but may vary a little. This can be risky when trading stocks that have low trading volumes. The investor runs the risk that the next available market price could vary greatly from the price in the order. Like limit orders, stop orders can be entered as a Kill or Fill order, Day Order or Good til Cancelled order.

Example

Using Jan's transaction example, she believes the stock price of XYZ will continue to fall in the short term and wants to buy the 100 shares at the lowest price possible. Jan will want to enter a Stop Order at a price of $10.50. Once that price is reached, it turns into a market order.

Then the next available market price could be $10 per share and Jan just saved herself some money by using the Stop Order. However, Jan does run the risk the next available market price could jump back up to $10.60.

Working with an Adviser

Investors are able to work directly with financial advisers to assist them with submitting trade orders. The way the order is placed depends on the type of relationship with investor has with the adviser. The most common forms are known as discretionary vs non-discretionary and solicited or non-solicited.

In a discretionary relationship, the investor gives the adviser the authority to place investment trade orders on their behalf. The adviser has the ability to place any type of trade order, at any time, for any security, as long as it is in the client's best interest and objectives.

Conversely, a non-discretionary relationship requires the adviser to get approval from the investor before each trade order is submitted. In this case, the adviser simply makes investment trade recommendations and the final decision is up to the investor.

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