While some investors choose to work with a financial advisor who invests on their behalf, others buy and sell their own stocks. When you buy stock, though, there are different varieties of stock orders you can use. Some orders execute immediately, while others only execute at a specific time or price. A few order types may even have additional conditions attached. What kind of order you use can make a big difference in the price you pay and the returns you earn. That makes it important to be familiar with the different types of stock orders.
Understanding Stock Order Types
A market order is when an investor requests an immediate execution of the purchase or sale of a security. While this type of order guarantees the execution of the order, it doesn’t guarantee the execution price. Generally, it will execute at (or close to) the current bid (sell) or ask (buy) price. Investors can provide either simple or complex market order instructions, which brokers or trading market venues can access.
When executing a market order, investors don’t have control over the final price. The execution of the stock order correlates to the availability of buyers and sellers. Depending on the pace of the market, the price paid or sold may drastically vary from the price quoted.
It’s also possible to split market orders. Splitting market orders may result in multiple price points, caused by several investors’ participation in the transaction. Since most market orders are typically simple, traditional and online brokers may receive a minimal commission.
What Is a Limit Order?
If you’re looking to execute an order at a specific price, you’ll want to complete a limit order. With a limit order, you determine a certain price you want to purchase or sell a security for. The order is only executed when you have a buyer or seller that will pay or sell a security for that price.
A buy limit order only executes at the limit price or below. For example, if an investor would like to purchase Apple Inc. for no more than $195 per share, the investor would place a limit order. Once the share price reaches $195, the order executes. While a sell limit is similar, it’s only executed when the stock reaches the limit price or exceeds it.
Limit orders can also have additional requirements such as fill or kill (FOK) or all or none (AON). When requesting a FOK, the order either executes right away or is completely killed. With an AON request, the entire order either goes through or not at all. If the order is not filled, the request will remain in the book until the order is completed.
Market and Limit Order Costs
If you’re trying to decide between a market order and a limit order then you may want to consider the cost difference. Commissions are generally more affordable for market orders than they are for limit orders. The difference in commission cost per order could be anywhere between $2 – $10 or more in rare cases. When you set a limit order you have to take into account the extra cost in commissions and make sure that it will be worth it, in the end, to sell at the right price.
For example, if you’re wanting to buy Stock A when it hits $25 per share, you might be paying an extra or losing your gain for buying at a lower price if you set a trade order. If the stock is currently $26 and you wait for it to hit $25, you could be paying an extra $5 or $10 for the trade to buy it at a $1 discount per share. So you’ll want to make sure you’re buying a significant amount at the lower share price to make it worth the extra cost.
What Are the Different Types of Conditional Orders?
Conditional orders allow investors to set triggers for securities. These options center around the price movement of securities, indexes, and other option contracts. An investor can select trigger values, security types, and timeframes for the execution of their orders. Below are some of the most common conditional orders you may use when trading.
The intention of a stop order is to limit the investor’s loss from a transaction. Investors usually request buy stop orders to limit their loss or protect their profit if they have shorted a stock. Investors may use a sell stop to minimize their loss or protect a profit on a security they own. Some of the most common stop orders include:
A buy market-if-touched order is an order that requests a buy at the best available price, or the “if touched” level. If the security price drops to this level, the order becomes a market purchase order. Whereas with a sell market-if-touched order, the sale occurs when a buyer wants to pay the “if touched” level.
One Cancels Other Orders
Investors can use a one cancels other order when they want to capitalize on one of two trading options. For instance, if an investor wishes to trade Stock ABC at $100 per share or Stock XYZ at $50 per share, the one who reaches the designated price first will be the one that occurs. So, if Stock ABC reaches $100 per share, the order is then executed and the order for Stock XYZ is canceled.
One Sends Other Orders
One sends other orders is when an investor wishes to send another order once their previous order is complete. For example, if a trader wants to buy Stock ABC for $100 per share and then what’s to turn it around and make a profit, they would need to complete a two-part order. The first part is a limit order for the purchase of Stock ABC at $100 per share. The second part would be to sell Stock ABC at $105 per share. Multiple orders go into the system simultaneously and are then executed in a sequential manner.
A tick-sensitive order is a stock order that’s conditional on an uptick or downtick. Investors can enter any tick-sensitive information for traders to complete. An example of this order is to buy on a downtick, or when the sensitive information causes a drop in share price.
At The Opening Orders
If an order lists the contingency at the opening, then the order must be one of the first trades of the day. If the order doesn’t execute right away, after the opening bell, then the order will not move forward.
What Is Time in Force (TIF)?
If you want to indicate how long an order will stay active, you’ll want to use a time-in-force order. For example, day orders or good-for-day orders (GFD) are orders where the investor would like to buy or sell a security during a certain timeframe. Once the investor requests the order, it will expire after a specified time during the day.
These orders are only valid during the day they’re requested in. If time-in-force orders are not executed during the day, they’re canceled at the end of the trading day.
Investors can also request good-til-canceled (GTC) which requires certain cancelation criteria to continue indefinitely. Another request option is an immediate or cancel order (IOC) which executes or cancels the order instantly.
Before you start buying stock, it’s important to understand the vocabulary of the investing world. Perhaps no lingo is more important than that which surrounds the different types of stock orders. Depending on whether you want to make a transaction immediately or wait until certain conditions have been met, you’ll need to place a different kind of order through your brokerage. Be sure to evaluate each trade individually so you can choose the order type that’s best under those circumstances.
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