Disclosure: Some of the links below may be affiliate links, meaning, at no cost to you, I may earn a commission if you click through and make a purchase.
If you are using a broker, you probably have seen that there are many types of stock market order types that you can for investing. Are you overwhelmed when you see all these options? Do not worry, most of them you will never need.
Personally, I have only used three different stock market order types in my investing life. Active Traders may use many stock market order types. But passive investors are not going to need more than a handful of them. In this post, I am going to go over the five most-used stock market order types that are available in most brokers.
All of these Stock Market Orders are available in Interactive Brokers (IB), my current stock market broker. But most of them should be available in most serious brokers.
Stock Market Orders
Through your broker account, you can submit orders to the stock exchange. When some conditions are met, your order will be filled and you will either buy or sell shares.
Each order type can be a buy order or a sell order. That is the direction of the order. For instance, you can have a Market Buy Order or a Market Sell Order. They are the same kind of order but in the opposite direction.
When you place an order, it may not be filled directly. For instance, you may have a set a price that is not possible when you put the order. The order will remain active for a certain amount of time. There are two main durations for orders:
- Day Order: The order is only valid on the day you create it. If it is not filled by the end of the day, the order will get canceled automatically.
- Good-Till-Cancel (GTC) Order: The order is valid for as long as it is not filled or canceled. Most brokers set a limit of 90 days for these orders.
There are also many other kinds of durations such as a duration in minutes or until a certain date. However, these durations are much less useful than the Day and GTC Orders.
1. Market Order
The default stock market order on all brokers is the Market Order. This is the simplest type of order. This order will simply buy or sell at the current market price. The broker will fill this order at the best available price. People use a Market Order when they really want to buy or sell as fast as possible.
A single Market Order can be split across multiple orders of the opposite direction. For instance, if you want to buy 1000 shares of X at market price, sell orders from several orders could be used to fill your buy order.
Generally, you should not use a Market Order. There can be some significant differences over time in the price of a stock. Using a Stock Market Order can make a large difference.
2. Limit Order
The Limit Order should be the most used stock market order type. It is very simple and should be your default order type!
A Limit Order has a limit at which you want to buy or sell. If you have a Buy Limit Order at 50$, the order will be filled once there are people selling at 50$ or below. On the other hand, if you have a Sell Limit order at 100$, it will be filled once there are people buying at 100$ or more.
A Limit Order is a guarantee that you will not buy higher or sell below a limit. Even if you put it very close to the market price, it will give you some more safety that it will be filled at a price you are comfortable with.
Unless you have some special needs, you should always a Limit Order. For instance, you will generally use this order type to buy an Exchange Traded Fund (ETFs).
You should just be careful that if you put a Limit Price too different from the current price, it may never be filled or filled much later than you think. Do not use this too much to time the market!
3. Stop Order
The Stop Order is a bit different than the Limit Order. It is not really a real order. It will place a Market Order once the share reaches a certain price.
A Sell Stop is always placed below the market price. The idea is to limit your losses by selling if the price goes down too much. For instance, if you use a Sell Stop Order at 100$, once the price of the stock falls to 100$, a Market Order will be placed on the market. That means that as soon as it reaches 100$, you will sell at the best available price.
A Buy Order, on the other hand, is placed above the market idea. This is more rarely used. The idea is to buy once the price goes up. This can be useful if you are shorting the stock and want to protect your returns. The principle is exactly the same. If you use a Buy Order at 50$, as soon as the price increases to 50$, a Market order will be placed. You will then buy at the best available price. You need to be aware that if the market is moving very fast, your order could be filled at a very different than your order.
There are very few cases where you would need to need this kind of stock market order. It could make sense to use it to cut your losses if you do some investing in individual shares. However, if you are mostly a passive investor, you will not need these kinds of limits.
4. Stop Limit Order
If you understand the Stop Order, you will have no problem understanding the Stop Limit Order. Once again, it is not really an order per se. It will emit a Limit Order once a certain price is reached.
The only difference with the Stop Order is that it places a Limit Order instead of a Market Order. This is a significant difference. Once the share price reaches the price of the Stop Order you know that the order will be filled. Now, if the share price reaches the Stop Limit Order price, you do not have this guarantee. It will depend on the Limit Price you set.
Let’s make an example to make sure it is clear. Let’s say you want to sell shares of X if the price goes below 100 but you do not want to sell at less than 99.50. For this, you can use a Stop Limit Order with a price of 100 and a limit of 99.50. If the market goes down below 99.50 before the limit order was filled, it will not be filled. That will protect you from selling lower than you want. On the other, if you really wanted to sell, you may be left with your shares and the price may go down even more.
Stop Limit Order offers a little more safety than the Stop Order. However, there is no guarantee that the order will be filled. This is a bit of a trade-off between speed of execution and price.
5. Trailing Stop Order
This last stock market order is the most complicated to understand but it is also the most powerful. A Trailing Stop Order can be very useful. But there is often little reason to use compared to a Market Order.
As its name indicates, this order will trail the price of a share. You can either trail with a fixed amount or with a percentage. The trailing effect will be done as the price is going up for a Sell Order and as the price is going down for a Buy Order.
The most common usage is for a sell order. You can use a Trailing Stop Sell Order to secure the returns on a long position. You must set the price of the Trailing Stop Order below the current price. The trailing price will go up with the share price but will not go down.
For instance, you bought shares of IBRK at 30 USD. They are now at 40 USD. You want to sell if they fall back below 35 USD. You set a Trailing Stop Sell Order at a price of 35 USD and with a trailing amount of 5 USD. If the price increases to 42 USD, the trailing price will rise to 37 USD. If the price decreases to 38 USD, the trailing price will stay at 37 USD. Now, if the price recovers and goes all the way to 50 USD, the trailing stop will now be at 45 USD. If the price goes below 45 USD, your broker will generate a Market Order and this will sell your shares at the market price.
The other usage is when you have a short position of some shares. And you want to sell if the market goes up again. A Trailing Stop Buy Order works exactly the same way but with a reverse direction. The price must be above the current price.
For instance, you sold shares of IBRK at 50 USD, shorting the share. They are now at 40 USD and you want to buy if they reach 45 USD again. You set a Trailing Stop Buy Order at the current market price with a trailing amount of 5 USD. If the price goes down to 36 USD, the trailing price will go as well to 41 USD. But if the price goes up to 40 USD, the trailing price will remain 41 USD. When the price goes down to 30 USD, the trailing price declines as well to 35 USD. Now if the price goes back up to 35 USD, you will buy shares at the market price.
A Trailing Stop Order can be a powerful tool. But this is not generally something you are going to use if you are in the for the long-term. This is more a tool for active traders and for people who trade in single shares.
The Trailing Stop Order also exists in a Trailing Stop Limit Order variant. This is exactly the same difference as for the Stop Order And Stop Limit Order. Instead of submitting a Market Order, it will submit a Limit Order.
If you want more information about this kind of order, watch this video from Interactive Brokers:
These are the five most-used Stock Market Order Types! If you know these five types, you will know enough for your entire investing life. In fact, if you master the Limit Order, you should already be fine if you plan on investing for the long-term. So far, I have only used two order types!
Of course, there are many more stock market order types. For instance, Interactive Brokers is offering more than 60 Order Types and Algorithms for trading. But I do not think you need to know all of them or any of them for that matter. If you need another stock market order type than the five present in this article, you are probably a much more advanced trader than I will ever be.
What Stock Market Order Types do you use for investing?