Types of Orders | Trading Guide with Practical Examples

Here’s what we’ll cover:

• • What is an Order?
  • Types of Orders
    • Market Order
    • Limit Order
    • Stop-Loss Order
    • Trailing Stop-Loss Order
    • Stop-Limit Order
    • Take-a-Profit Order
    • Market-on-Close Order
    • Limit-on-Close Order
  • Time Stamps and Other Conditions
    • Day order
    • Good-Till-Cancelled (GTC) Order
    • Fill-or-Kill (FOK) Order
    • Immediate-or-Cancel Order (IOC)
  • Major Online Brokers | Available Types of Orders
  • Bottom line

An order is an instruction to buy/sell a security. You have made your due diligence on a stock/ETF, and you are now ready to invest. An order is the final step in the investment process. It is crucial because it is the last “revision” before pressing the trigger and actually buying/selling the asset you wish. It will dictate the execution success in terms of time and at the intended price. So let’s dive into the most common type of orders:

The market order is the most straightforward one you can find. It is an order to buy/sell at the available market price (you will pay the ask/bid price). So, the objective is simply to fulfil your order as soon as possible without knowing the actual price. This kind of order works well in very liquid markets since the buying/selling price will be the same or very similar to the one you notice on your trading screen (real-time price) before effectively placing the order.

This order limits (sorry for the redundancy) the price you buy/sell. So, you are the one who defines beforehand the maximum/minimum price you are willing to buy/sell. In this case, you can have peace of mind regarding the final price (you will not overpay or undersell). This type of order can be advantageous in markets with poor liquid conditions (i.e. small caps stocks, developing markets,…). On the other hand, it may take a while to be filled (time is not a priority here).

A stop-loss order will limit a loss if a security moves in an undesirable direction, but it does not guarantee the actual loss. In other words, you set a selling price, and if it reaches it, the order will be activated, and the security will be immediately sold at the current market price. Despite being associated with long positions, a stop-loss order can also be placed in a short position if the security price rises above a pre-defined price.

Example for a long position: You buy a stock for $10 and define a stop market order at 8$. If the stock drops to $8, your stop market order will be activated, and a sell order (at the best available price) will be given. This means that there is no assurance that the sell order will be filled at $8 (it could be higher or lower).

It derives from the stop-loss order and can be set at a percentage or absolute amount. Thus, it allows a trade to remain open as the price moves favourably for the investors. If a 20% trailing stop loss is added to a long position, a sell trade will be issued if the price drops 20% from its peak price after purchase.

Example: You invest in a stock trading at $10, and you set a trailing stop loss at 10%. From the initial purchase, if the stock drops to $9, a market order to sell will be given. Now imagine that instead, the stock goes to $15. In this case, your stop order followed the price movement, and it is now at $13.50 ($15*0.90). So, you are still protected on the downside, but you still keep the opportunity to gain from the continuous upwards movement.

A trailing stop loss is typically placed at the same time the initial trade is placed. However, it may also be placed after the transaction.

In this order, the logic is the same as the previous one. However, when the stop order is triggered at $8, it will sell for a pre-defined minimum price. Keep in mind that if the market opens at a gap, the order may not be fulfilled.

Following the example mentioned above, if you set a minimum price of $7.80, it means that you are willing to sell at a minimum price of $7.80 after hitting the $8 threshold. However, if the day before, the stock was trading at $8.20 and, on the following trading day, it opens at $7.50, your order will not be filled! If you still wanted to close your position, you would need to sell it in your brokerage account manually.

With this order, you can pre-define the profit you want to take. If you set it at +30% of your original purchase price, a market order will be trigged as soon as the prevailing market price reaches the intended price.

It is very similar to a market order because the trading price will be the prevailing market price. The only difference is that a market on close is executed near the closing price of that trading day. For instance, in the NYSE (New York Stock Exchange), the market closes at 4 p.m., meaning that a market on close order must be submitted by 3:45 p.m.

The same principles apply as before, but it includes a limit order that controls the price paid for a security or what price a security is sold at. This option will not guarantee execution because the price set may never be reached, just like a simple limit order.

Note: Market/limit-on-close orders are not standard in most brokers. Interactive Brokers is the only broker we are aware of that offers these options.

A second set of rules is also included in brokerage accounts, and it consists of the time you want your order to be in place and how you want it completed. Most relevant ones:

In practice, this is the most used version. It simply states that your order will be “alive” during the trading day you submitted your order. As soon as the trading day ends, your order will be automatically cancelled if not fulfilled, and you must reopen it if you are still keen on buying/selling it.

It is a kind of order that can persist indefinitely. In theory, it will be on hold until it reaches a specific price. Nonetheless, most brokers have a time limit between 60 and 90 days.

The order dictates that the entire order must execute immediately or be cancelled. It is structured to ensure that the investor does not receive a partial fill that would not suit his investment objectives.

This order instructs your broker to fill the order or cancel it immediately. It distinguishes it from the FOK order because it not only can be filled entirely but also partially. In the latter, the remaining shares that are not filled will be instantly cancelled.

Looking at the brokerage industry, we can easily find most of the above order types, and you will quickly notice that some of them are standard in all brokers. Here is a quick summary of some well-known online brokers:

During your trading activities, you will soon realize that the most typical orders are market and limit orders. We believe you will only use the other order types on special occasions (volatile market, low liquid stock,…).

Besides, orders can be edited (or even cancelled) after being placed, so do not worry if you misspell a number. You also need to be aware that there are rules in the priority of trades. For instance, market orders receive the highest priority, followed by limit orders.

All in all, every single type of order has its own pros and cons that you should familiarize to get the most out of your investment platform.

Hope we helped, and leave your comments below.

Happy investments!