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Revision as of 18:41, 3 August 2005
Understanding how different types of orders work may make a difference in whether your trade gets executed and at what price. You can learn more about each of the different types of orders listed below:
A market order is an order to buy or sell at the current market price.
The advantage of a market order is you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers).
The disadvantage is that you will pay the spread and that you may experience slippage. This may be especially true in fast-moving markets where market prices are more volatile. When you place an order "at the market," particularly for a large number of shares or futures contracts, there is a greater chance you will receive different prices for parts of the order.
To avoid buying or selling a stock or future at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses if the stock drops later in the day or the weeks ahead.
Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price.
A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order.
Buy Stop Order â€” Investors typically use a stop order when buying stock to limit a loss or protect a profit on short sales. The order is entered at a stop price that is always above the current market price.
Sell Stop Order â€” A sell stop order helps investors to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell is always placed below the current market price.
The advantage of a stop order is you don't have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.
The use of stop orders is much more frequent for stocks that trade on an exchange than in the over-counter (OTC) market. In addition, your broker-dealer may not allow you to place a stop order on some securities or accept a stop order for OTC stocks. Before you enter into these types of orders, you should speak to your broker or financial advisor about how these orders work.
A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price.
The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock's price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly.
Unless you give your broker specific instructions to the contrary, orders to buy or sell a stock are "day orders," meaning they are good only during that trading day. Orders that have been placed but not executed during regular trading hours will not automatically carry over into after-hours trading or the next regular trading day. Similarly, day orders placed during after-hours trading can only be executed during that after-hours session. If your order is not executed during a trading session, you will have to place a new order in the next trading session.
Good-till-cancelled Order (GTC)
Unlike day orders, a good-til-cancelled (GTC) order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or cancelled. A GTC order will not be executed until the limit price has been reached, regardless of how many days or weeks it might take. Investors often use GTC orders to set a limit price that is far away from the current market price. Some brokerage firms may limit the time a GTC order can remain in effect and open.