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Different types of orders

Lesson in Course: Investing basics (advanced, 6min )

We've decided what we want to invest in. How do we place a trade?

Brokerages connect us with the financial markets and offer services to help us buy and sell our assets. Brokerages require instructions from us to tell them exactly how we like our investments purchased and sold. Let's review the set of instructions we can provide.

The video below will help us hit the ground running.

Market orders, limit orders, stop-loss orders, and stop-limit orders

Market order

The most common order, a market order, tells the broker to match us with all available buyers willing to pay the highest price and all available sellers offering the lowest price. Typically, brokerages assign the highest priorities to market orders, so these orders are appropriate when we need something done right away.

Limit order

Limit orders allow us to specify a maximum or minimum price that we are willing to buy or sell our shares. If there isn't anyone who will meet our minimum, the order will sit in a queue. Our Time in Force selection tells the brokerage how long to keep our trades in the queue.

Time in Force

Good-for-day will tell our brokerage to cancel all orders in the queue at the close of the nearest market day. 

Good-till-canceled gives the brokerage 90 days to try to fill this trade before canceling. We also have the option of killing the order anytime before the 90 days.

A tip for Time in Force

Good till canceled is useful when we have determined a set price we would like to purchase or sell our shares — It lets us set it and forget it.

 

Stop

A stop order is a method to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. With a stop order, we have to set a stop price and once the market price of the shares meets this criterion, the order turns into a market order and fills immediately.

Stop limit order

A stop-limit order is a more complex stop order. The instruction combines a stop-loss with a limit order. Instead of triggering a market order at the stop price, the brokerage puts a limit order in place, and we'll have to set a Time in Force.

How to use these orders

When time matters

Market orders are the fastest orders.

We use a market buy order when we want to buy a stock as soon as possible. When we submit a market buy order, the brokerage will match us with a seller at the best available (lowest) price. There is no guarantee when submitting a market buy order that we will find a seller at the last quoted price. In a time of high demand, we could end up paying a lot more than the price shown.

Similarly, we want to use a market sell order when we need to sell a stock as soon as possible. The brokerage matches us with a buyer at the best available price (highest). The outcome can be higher or lower than expected if the market is moving quickly.

When price matters

Limit orders let us set a price.

We will use a limit buy order to set the maximum per-share price we are willing to pay. The sellers who are eager to sell at that price will sell us their shares in the order they arrive. These orders protect us from wild price swings. 

We will use a limit sell order to set a minimum per-share price we are willing to sell. Any buyers who meet us at our offer will buy our shares depending on the amount available.

A limit sell example

If we bought QQQ, a technology ETF, at $300 and will be happy with a 10% return, we can set a limit sell order at $330, Good till canceled. If at any point in the next 90 days, QQQ goes above $330, we would automatically cash in on our position without needing to monitor the price vigilantly.

 

When trading individual stock

Stop orders give us more control.

When buying individual stocks, a stop buy order allows us to capitalize on an upswing. To do so, we set the stop price to be higher than the current market price—if the stop price is equal to or lower than the current market price, the stop loss buy order becomes the same as a market order since the criterion is true. 

A stop buy example 

If PTLA is currently trading at $18.00, we don't want to buy shares today because the company reports earnings tomorrow. We can set a stop loss buy order at $18.25. If the company announces good news and the stock rises, we'll buy at the market value when the stock passes $18.25. In the case the results are poor and the stock drops, our buy order will never execute.

A stop-loss sell order helps protect against downward price movements. The stop price is set lower than the current market price, and once put in place, if our stock price starts dropping beyond the stop price we had set, the trade executes as a market sell order and potentially limits our losses before the stock plummets further. This order may not provide sufficient protection in rapidly declining markets as the market price can be much lower than our stop price. A major drawback is if the markets recover after a sharp crash, and we sold at the lows.

 

We can use a stop limit buy order to help prevent us from overpaying. In practice, the limit price should be higher than the stop prices, or else this would be the same as a stop loss buy order.

Stop limit buy example

PTLA is planning to share the results from a clinical trial, and depending on success, that could launch a new line of business valuing the shares well over $35. The stock is currently trading at $18, and we will set a stop price at $18.50 with a limit order at $33.  Any upward price movement the next day will trigger our limit buy order, and our limit buy order will make sure we don't pay more than $33 per share.

 

We can use stop-limit sell order to lock in some gains on some of our winners. The limit price needs to be set lower than the stop price, or it becomes a stop-loss sell order.

Stop limit sell example

Let's assume that we had bought PTLA at $20 a share, and now the shares are trading at $40 per share! We are worried that it's close to being overvalued, and we think the fair value is closer to $37 per share. We will set a stop limit sell order with a stop price of $39 and a limit order of $37. Once people start selling enough to make the stock price drop to $39, we will initiate a limit sell order with the minimum price of $37 so that we don't sell for less than what we think the shares are worth.

 

Glossary

What is Market order?

The most common order, a market order, tells the broker to match us with all available buyers willing to pay the highest price and all available sellers offering the lowest price. Typically, brokerages assign the highest priorities to market orders, so these orders are appropriate when we need something done right away.

What is Limit order?

Limit orders allow us to specify a maximum or minimum price that we are willing to buy or sell our shares. If there isn't anyone who will meet our minimum, the order will sit in a queue. Our Time in Force selection tells the brokerage how long to keep our trades in the queue.

What is Stop Order?

A stop order is a method of buying or selling that allows us to include limiting criteria. With a stop, we can set a stop price, our standards of selling or buying. Once the price meets these criteria, the order turns into a market order and fills immediately.

What is Stop limit order?

A stop-limit order is a more complex stop-loss order. The instruction combines a stop-loss with a limit order. Instead of triggering a market order at the stop price, the brokerage puts a limit order in place, and we'll have to set a Time in Force.

What is Good-for-day ?

Time in force instruction that will tell our brokerage to cancel all orders in the queue at the close of the nearest market day. 

What is Good-till-canceled?

Time in force instruction that gives the brokerage 90 days to try to fill this trade before canceling. We also have the option of killing the order anytime before the 90 days.

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