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If you are using a broker, you probably have seen many stock market order types that you can use for investing. Are you overwhelmed when you see all these options? Do not worry, most of them you will never need.
I have only used two stock market order types in my investing life. Active Traders may use many stock market order types. But passive investors will not need more than a handful of them. In this article, I will review the five most-used stock market order types available by most brokers.
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, the exchange will fill your order, 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, the exchange may not fill it directly. For instance, you may have 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 when 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 some duration if not filled or canceled. Most brokers set a limit of 90 days for these orders.
There are also many other durations, such as a duration in minutes or until a specific date. However, these durations are less useful than the Day and GTC Orders.
1. Market Order
The default stock market order on all brokers is the Market Order. A Market Order is the simplest type of order. This order will buy or sell at the current market price. The broker will fill this order at the best available price. People use a Market Order to buy or sell as fast as possible.
A single Market Order can be split across multiple orders in 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.
Many people will tell you not to use to Market Orders. And in some cases, this is sound advice. However, many people will exaggerate the downsides of market order.
The main issue with market orders is that historically some people put some very low buy offers or very high sell offers to capture market orders with a very large spread.
However, these days, most brokers will protect their customers and refuse to match orders too far from the market price. And if you invest in highly traded ETFs (high volume), the spread will be low anyway.
I almost only go with Market orders to buy more ETF shares. It is simpler and more reliable (at least with IB).
If you want to be sure about the price you will get, you should not use a Market Order. Otherwise, they are not as bad as people say they are.
2. Limit order
The Limit Order should be the most used stock market order type. It is straightforward 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$, the exchange will fill the order once people sell at 50$ or below. On the other hand, if you have a Sell Limit order at 100$, it will be filled once people buy at 100$ or more.
A Limit Order guarantees 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 can always use a Limit Order. For instance, you will generally use this order type to buy an Exchange Traded Fund (ETFs).
You should 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 a real order. It will place a Market Order once the share reaches a specific price.
A Sell Stop order is always 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$, once the stock price falls to 100$, the broker will place a Market Order on the market. That means that as soon as it reaches 100$, you will sell at the best available price.
A Buy Stop Order, on the other hand, is placed above the market idea. This order is rarely used. The idea is to buy once the price goes up. This order can be useful if you short the stock and want to protect your returns. The principle is the same. If you use a Buy Order at 50$, as soon as the price increases to 50$, a Market order will be placed. You will then buy it 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 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 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 an order per se. It will emit a Limit Order once a specific price is reached.
The only difference with the Stop Order is that it places a Limit Order instead of a Market Order. This difference is quite significant. Once the share price reaches the price of the Stop Order, you know that the order will be filled. 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.
We can take an example to make sure it is clear. In this example, 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 is filled, it will not be filled. That will protect you from selling lower than you want. On the other, if you 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. These orders are 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 it 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 goes up for a Sell Order and as the price goes 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 increase with the share price but will not decrease.
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 35 USD and 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 to 50 USD, the trailing stop will be at 45 USD. If the price goes below 45 USD, your broker will generate a Market Order, selling 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 the same way but in a reverse direction. The price must be above the current price.
For instance, you sold shares of IBRK at 50 USD, shorting the stock. 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 drops to 36 USD, the trailing price will go to 41 USD. But if the price goes up to 40 USD, the trailing price will remain 41 USD. If the price drops to 30 USD, the trailing price declines to 35 USD. If the price goes back 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 will use if you are in for the long-term. This order is more a tool for active traders and people who trade in single shares.
The Trailing Stop Order also exists in a Trailing Stop Limit Order variant. The difference is the same as the Stop Order And Stop Limit Order. Instead of submitting a Market Order, it will submit a Limit Order.
Of all the orders presented, this is the only one not present in all Interactive Brokers interfaces. It is not available in The Account Management interface.
Order Types for passive investors
Even though these are the five most used stock market order types, in practice, you will probably need only one: The Market Order.
If you are a simple passive investor like me, you will not need complicated or advanced stock market order types. In fact, in the years I have been investing, I have only used Market and Limit orders. I have never needed other order types.
You do not want to time the market when you want to invest. So, you want to buy the price now. You could use market orders by default. Or, if you want more control over the price, a simple limit order is fine. But you still need to be careful about limit orders. If you put it too low, you take the risk of not having your order filled. It means that you will not have bought the shares you wanted.
So, do not be too greedy with your Limit Order. You want to avoid having your market order filled at a price far from the market price.
Remember: Keep your investing simple!
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. 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 offers 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 in this article, you are probably a much more advanced trader than I will ever be.
If you do not have a broker account already, I recommend using Interactive Brokers. Read my guide on How to open an Interactive Brokers account.
What Stock Market Order Types do you use for investing?
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