Market order
With a market order, the focus is on time. A market order is the most basic and default option you can select when putting in an order for a trade. It means your trade will be executed at the available market price without any specified price limit. The market order is the best option if you want your order to be executed immediately.
It’s important to keep in mind that the market order doesn’t guarantee the price. In fact, the last traded price is not necessarily the price at which your market order will be executed. In a fast-moving and volatile market, the price difference can differ.
Limit order
The limit order focuses on a more favorable price than the current one. A limit order lets you specify a price, called the limit price, at which you want to buy or sell a given asset. It means your buy order will be executed only at the limit price or a lower one.
In the case of sell limit orders, the order will only be fulfilled at the limit price or a higher one. This allows the trader to better control the prices they trade at. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a pre-determined price for the stock.
Stop order
A stop order is a type of market order to buy or sell a stock when the stock price moves over or below a particular price, which is called the stop price. If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. A buy stop order is entered at a stop price above the current market price. A sell stop order is entered at a stop price below the current market price. This way traders can limit their losses and secure some profits.
Keep in mind that short-term market fluctuations in a stock’s price can activate a stop order, so that stop price should be selected carefully. Also, the stop price is not the guaranteed execution price for a stop order, it is only a trigger that causes the stop order to become a market order. The execution price for this market order can differ significantly from the stop price if there is great market volatility.
For your own safety, check with your brokerage firm how they determine if the stop price has been reached, the differences in interpretation can cost money.
Stop-limit order
This order combines the features of a stop order and a limit order. It order will be executed at a specified price, or better, after a stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.
The benefit of this option is that the investor can control the price at which the order can be executed. Consider this though: short-term market fluctuations in a stock’s price can activate this type of order, therefore stop and limit prices should be selected carefully. The stop price and the limit price for a stop-limit order do not have to be the same. For example, a sell stop limit order with a stop price of $5 may have a limit price of $3. This order would become an active limit order if market prices reach $5, although the order could only be executed at a price of $3 or better. Again, check with your brokerage firm how they understand stop-limit orders and when to trigger them.
Stop-loss order
A stop-loss is designed to limit an investor’s loss on a position that makes an unfavorable move. A stop-loss order means that you give instructions via your trading platform that the system should automatically sell your asset when the price drops to or below a pre-specified level. At short positions the stop-loss is triggered when the price increases at a pre-specified level.
You will find more details on the different types of orders in this article.
Adrian Reid, a stock trading coach and founder of Enlightened Stock Trading, helped us shine a light on order types and what are the best cases to use stop and limit orders.