A market order is an order to buy or sell a stock at the best available price. Generally, this type of order will be executed immediately. However, the price at which a market order will be executed is not guaranteed. It is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed. In fast-moving markets, the price at which a market order will execute often deviates from the last-traded price or “real time” quote.
Example: An investor places a market order to buy 1000 shares of XYZ stock when the best offer price is $3.00 per share. If other orders are executed first, the investor’s market order may be executed at a higher price.
In addition, a fast-moving market may cause parts of a large market order to execute at different prices.
Example: An investor places a market order to buy 1000 shares of XYZ stock at $3.00 per share. In a fast-moving market, 500 shares of the order could execute at $3.00 per share and the other 500 shares execute at a higher price.
A limit order is an order to buy or sell a stock at a specific price or better. 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. A limit order is not guaranteed to execute. A limit order can only be filled if the stock’s market price reaches the limit price. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a predetermined price for a stock.
Example: An investor wants to purchase shares of ABC stock for no more than $10. The investor could place a limit order for this amount that will only execute if the price of ABC stock is $10 or lower.
A stop order, also referred to as a stop-loss 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 stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.
Before using a stop order, investors should consider the following:
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, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.
Before using a stop-limit order, investors should consider the following:
A trailing stop order is a stop or stop limit order in which the stop price is not a specific price. Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (“trailing stop price”). As the price of the security moves in a favorable direction the trailing stop price adjusts or “trails” the market price of the security by the specified amount. However, if the security’s price moves in an unfavorable direction the trailing stop price remains fixed, and the order will be triggered if the security’s price reaches the trailing stop price.
Example of a sell trailing stop order:
- You buy XYZ stock at $20 per share.
- XYZ rises to $22.
- You place a sell trailing stop order with a trailing stop price of $1 below the market price.
- As long as the price moves in your favor (i.e., increases, because here you are looking to sell it), your trailing stop price will stay $1 below the market price.
- The price of XYZ peaks at $24 then starts to drop (not in your favor). Your trailing stop price will remain at $23.
- Shares are sold when XYZ reaches $23, though the execution price may deviate from $23.
Before using a trailing stop order, investors should consider the following:
Investors should carefully select the trailing stop price they use for a trailing stop order since short-term market fluctuations in a stock’s price can activate a trailing stop order.
As with stop and stop-limit orders, different trading venues may have different standards for determining whether the stop price of a trailing stop order has been reached. Some exchanges use only last-sale prices to trigger a trailing stop order, while other venues use quotation prices. Investors should check with their brokerage firms to determine which standard would be used for their trailing stop orders.
The one cancels other order option allows you to place a pair of orders stipulating that if one order is executed fully or partially, then the other is automatically canceled. An OCO order combines a stop order with a limit order. This option allows you to place both take profit and stop loss targets for your position (only for limit orders).
Example: If the market price is 250 and the trader wants a stop order at 245 and a limit order at 260, then a OCO order may be appropriate. If the market reaches 245, the stop order will trigger a market order and cancel the limit order at 260. If the market reaches 260 before 245, the limit order will execute and cancel the stop order at 245.
Note: If you manually cancel one of the OCO orders; i.e., the stop or the limit, you must also manually cancel the other one. An OCO order is only automatically canceled if the other order is partially or fully executed by market price movement.