Order types in depth

In short

A friend of mine once sent an order to buy a stock at the market price and got a fill a good bit higher than the price on his screen. He was not being foolish. He just did not know what he had asked for. You can avoid that surprise by learning a handful of order types. A market order asks for a fast fill at whatever price is there. A limit order sets the worst price you will accept, but it may never fill. A stop order waits for a price to be touched and then turns into another order. Check the type on your order screen before you press send. Read the fine print your broker gives you, since the details differ from one firm to the next.

The whole of it

What it is

I once watched a man at a farm auction wave his hand without knowing the bidding had jumped. He ended up paying more than he planned. An order type is your way of telling the market how you want to bid or sell, so there are no jumps you did not see coming.

When you place a trade, you are not just choosing a stock and a number of shares. You are also choosing the rules for how the trade may happen. Those rules are the order type. The main ones are the market order, the limit order, the stop order, the stop limit order, and the trailing stop. Each one trades away something to get something else. Speed, price control, and certainty of a fill do not all come together. You pick which one matters most to you for that trade.

You have probably heard the words bid and ask. The bid is the highest price a buyer will pay right now. The ask is the lowest price a seller will take right now. The gap between them is called the spread. Every order type is really a way of dealing with that gap.

How it works

If you are holding a market order, here is what you have told your broker. Get me in or out right now at the best price available. The order goes to the front of the line and fills against whatever is on the other side. For a busy stock, the fill is usually very close to the last price you saw. For a thinly traded one, the gap can be wide, and your fill can land far from the quote. Market orders buy certainty of a fill and give up control of the price.

A limit order flips that. You name a price, and the order fills only at that price or better. A buy limit will not pay more than your number. A sell limit will not take less. That protects you on price. The cost is that the market may never come to you, and then nothing happens. A friend of mine calls this the fishing line trade. You drop the line at your price and wait.

A stop order is a sleeping order. You set a trigger price. Nothing happens until the stock trades at that price. Then a sell stop becomes a market order, and it fills at the next price available. That price can be worse than your trigger, especially when prices are moving fast. A stop limit order is a close cousin. When the trigger is touched, it becomes a limit order instead of a market order. You get price control back, but you may not get filled at all.

A trailing stop moves its trigger as the price moves in your favor, by a dollar amount or a percent that you choose. If the price falls back by that amount, the order wakes up. It never moves the other way.

You will also see time settings. A day order expires at the close of the day. A good till canceled order stays open until it fills or you cancel it, though many brokers put an outer limit on how long that lasts. Your broker's help pages will tell you their rule.

The numbers, and where to find yours

Some of the numbers here belong to you, and some belong to the rules. Your own numbers sit on your order screen. Look for the bid, the ask, the last price, and the volume, which is how many shares have traded today. The spread is just the ask minus the bid. You can work it out in your head.

The rules come from your broker and from the regulators. Your broker publishes a page on how it routes orders. Under SEC Rule 605, market centers publish reports on their execution quality, and under SEC Rule 606, brokers publish reports on where they send customer orders. Both are on the SEC website, and most brokers link to the 606 report from their own site. Brokers may also charge a commission or a fee on certain order types, so check the fee schedule your firm posts. If you ever trade on margin, the initial margin limit under Regulation T is the current figure, which the official source publishes each year, and FINRA sets the pattern day trader minimum equity at the current figure, which the official source publishes each year. Those figures come from the rule books, so I will let the site fill in the current ones with their source and date.

A worked example

Let me tell you about Maria. She is a teacher who wants 100 shares of a company. The screen shows a bid of 49.90 dollars and an ask of 50.10 dollars. The spread is 50.10 minus 49.90, which is 0.20 dollars per share.

If Maria sends a market order to buy, she pays the ask. That is 100 shares times 50.10 dollars, or 5,010 dollars. If the price jumps to 50.40 dollars before her order reaches the market, she pays 100 times 50.40, or 5,040 dollars. That is 30 dollars more than she expected.

Now say Maria sends a buy limit order at 49.95 dollars. She will pay no more than 49.95 dollars a share, so her most she can spend is 100 times 49.95, or 4,995 dollars. That is 15 dollars less than the market order at the ask. But the ask is 50.10 dollars, so her order sits and waits. If the stock never falls to 49.95 dollars, she buys nothing. She saved money in one path and missed the trade in the other.

Later, Maria owns those shares and wants a safety net. She places a sell stop at 47.00 dollars. The stock slips, touches 47.00 dollars, and her order wakes up as a market order. In a quick drop, it might fill at 46.60 dollars. She then receives 100 times 46.60, or 4,660 dollars, not the 4,700 dollars she saw in her head. Had she used a stop limit with a limit of 46.80 dollars, she would have refused any fill below 46.80. In that same fast drop she might have gotten no fill at all. Neither choice is wrong. Each one gives up something.

Where it goes wrong

You have probably heard a story like this one. A person places a market order just after the opening bell, when prices swing the most, and the fill looks nothing like the quote. Market orders in fast or thin markets are where most surprises live.

Another slip is treating a stop order as a promise. A stop is a trigger and not a guarantee of any price. In a gap, where a stock opens far below where it closed, the stop wakes up and fills at the new, lower price. That is how a stop set at 47.00 dollars ends in a fill at 44.00 dollars.

Limit orders have their own trap. If you set the price too far from the market, you may sit idle while the stock runs away without you. Some people then chase it with a market order and pay more than the first plan would have cost. Take care.

A fourth mistake is forgetting an old order. A good till canceled order can wake up weeks later at a price you no longer want. Check your open orders the way you would check the stove before leaving the house.

Last, watch the extended hours. Trading before the open and after the close is thinner, and spreads are often wider. Some brokers limit which order types you can use then, and a few take only limit orders. Read what yours allows.

Questions to answer before you leave this page

What do I care about most on this trade, a quick fill or a set price? Do I know today's bid, ask, and spread for this stock? If the price jumped against me, could I live with the fill? Is this stock busy enough that a market order will behave? Have I chosen a time setting, and do I know when the order expires? Do I remember every order still open in my account? And does my broker's help page say something different from what I assumed?