How to choose your stock order type

Written by
Eszter Z.
Fact checked by
Adam N.
Apr 2024
How to choose your stock order type

When you start to buy and sell shares online, your trading platform usually offers you a number of different order types to choose from. They have their own purpose and you should use them depending on what your aims are when trading. Also take into account how comfortable you are with taking risks, and what your investment style is. It will help determine how to pick the type of order you want to use. 

As you start trading you’ll need a brokerage account, and add money to it. Before you dive into the world of trading you should research companies and which shares you want to buy. Consider starting with a small amount of shares to get a feel for trading, but don't forget to diversify your portfolio. Once you decide which shares to buy, you will need to put in an order. 

First let’s see what are the main types of orders usually on offer on online broker platforms and dive into their key characteristics!

Types of orders

Market order

With a market order, the focus is on time. A market order is the most basic and default option you can select when putting in an order for a trade. It means your trade will be executed at the available market price without any specified price limit. The market order is the best option if you want your order to be executed immediately.

It's important to keep in mind that the market order doesn't guarantee the price. In fact, the last traded price is not necessarily the price at which your market order will be executed. In a fast-moving and volatile market, the price difference can differ.

Limit order

The limit order focuses on a more favorable price than the current one. A limit order lets you specify a price, called the limit price, at which you want to buy or sell a given asset. It means your buy order will be executed only at the limit price or a lower one.

In the case of sell limit orders, the order will only be fulfilled at the limit price or a higher one. This allows the trader to better control the prices they trade at. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a pre-determined price for the stock.

Stop order

A stop order is a type of market order to buy or sell a stock when the stock price moves over or below a particular price, which is called the stop price. If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. A buy stop order is entered at a stop price above the current market price. A sell stop order is entered at a stop price below the current market price. This way traders can limit their losses and secure some profits. 

Keep in mind that short-term market fluctuations in a stock’s price can activate a stop order, so that stop price should be selected carefully. Also, the stop price is not the guaranteed execution price for a stop order, it is only a trigger that causes the stop order to become a market order. The execution price for this market order can differ significantly from the stop price if there is great market volatility.

For your own safety, check with your brokerage firm how they determine if the stop price has been reached, the differences in interpretation can cost money.

Stop-limit order

This order combines the features of a stop order and a limit order. It order will be executed at a specified price, or better, after a stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

The benefit of this option is that the investor can control the price at which the order can be executed. Consider this though: short-term market fluctuations in a stock’s price can activate this type of order, therefore stop and limit prices should be selected carefully. The stop price and the limit price for a stop-limit order do not have to be the same. For example, a sell stop limit order with a stop price of $5 may have a limit price of  $3. This order would become an active limit order if market prices reach $5, although the order could only be executed at a price of $3 or better. Again, check with your brokerage firm how they understand stop-limit orders and when to trigger them.

Stop-loss order

A stop-loss is designed to limit an investor's loss on a position that makes an unfavorable move. A stop-loss order means that you give instructions via your trading platform that the system should automatically sell your asset when the price drops to or below a pre-specified level. At short positions the stop-loss is triggered when the price increases at a pre-specified level.

You will find more details on the different types of orders in this article

Adrian Reid, a stock trading coach and founder of Enlightened Stock Trading, helped us shine a light on order types and what are the best cases to use stop and limit orders.

"Both stop and limit orders can be used to enter and exit trades, however, the use case for each is quite different. The most common use of a stop order is when you have a long position in a stock and you place a sell stop below your entry price to get you out if the market moves against you. This is commonly called a 'stop-loss order'. However, less well-known is using a stop order to enter a trade. If you want to buy a stock but only if it confirms your analysis by moving up to a certain level (for example above the previous day's high), then you would set a buy stop order that would be triggered if the stock moves up to that level. This gets you in only if your analysis is confirmed by price movement in the right direction.

Similarly, limit orders can be used to enter or exit trades. If you want to enter a trade lower than the current price, then you place a limit order to buy at your desired price level. This is particularly useful when you trade mean reversion strategies which enter on a dip and sell after a bounce in price. The second use for a limit order is to exit with profits once you are in a trade. Let's say you enter a stock at $100/share and you want to take profits if your stock moves 25% in your favor. In this case, you would place a limit sell order on a 'good till canceled' basis at $125/share. When the market moves up to $125 your order will be filled and you will be out of your position with your desired 25% profit."

Keep in mind that you can also set the duration of your order. 

  • A day trade or“good for day” order will expire at the end of the day.
  • A “good-til-cancelled” (GTD) order remains in play until the trader ends it or the order expires. 
  • "Immediate-or-cancel" (IoC) order must be executed immediately, and any portion of the order that cannot be filled immediately will be cancelled.
  • "Fill-or-kill "(FOK) is an order to buy or sell a stock that must be executed immediately in its entirety, otherwise, the entire order will be cancelled, no partial execution is allowed.
  • "All-or-none (AON) is an order to buy or sell a stock that must be executed in its entirety, or not executed at all. They can, however, remain active until they are executed or cancelled.

How to choose your order?

Most traders place a limit or market order, so here we are going to take a closer look at those two options. In essence, with the market price you trade the stock for its current market price. With the limit order, you can name a specific price and if the stock hits it, the trade is executed. 

So what should you consider with a market order?

In case you are buying a stock, a market order will be executed at whatever price the seller is asking. If you’re selling, it will be executed at whatever the buyer is bidding. The drawback is that you don't control the price, you can have an effect on the time of the order’s execution. That can get tricky with shares whose price moves very quickly: you can end up with a different price compared to when you entered your market order. 

Check your broker’s execution disclaimer, as some brokers put all requests together and execute them all at once at the current market price at the end of the day or a specific time. Also, keep in mind that if you place a market order after trading hours, your order will be placed when the market opens next at the prevailing market price at that moment - which could be different compared to when you placed your order. 

  • If you are a long-term investor, you base your assumptions on fundamentals, and the smaller market prices moves concern you less.
  • If executing a trade is the most import to you.
  • You are ordering a highly liquid stock and spreads are small, basically you are trading the stock of a large company.
  • You’re trading relatively few shares, especially on a larger stock, so you are less likely to move the price.

And what you should consider with regards to a limit order:

A limit order guarantees the price you’ll get when the order is executed, but there is no guarantee the order will be executed fully, or that it will be executed at all. Especially, if you decided to trade in small, illiquid stocks. They are placed on a first-come first-served basis, and only after market orders are filled. 

You can set limit orders to be executed after you entered your order. But watch out, the price can move a lot and if it moves upwards compared to your limit sell order, you might lose money. You can end up paying more if you enter a limit order to buy when bad news hits the market, and you might have to buy higher than the stock’s current price. 

Keep in mind that they can cost more in commissions than market orders, as transaction costs may be charged throughout several days if the orders cannot be filled in one single trading day. You can refine your limit order with an “all or none order” which means your order will be executed only when all the shares you wish to trade are available at your price limit. 

The limit order option is for you:

  • If you are a trader who is looking on the short-term trends and much more focused on the market price, but you can wait for your price. Limit order to buy in with a stop-loss order to sell is useful.
  • If you are buying a not very highly traded stock, whose price can jump around, so it is useful to minimize your costs.
  • If you are trading large number of shares, in which case a slight price change can mean a lot of money.

Keep in mind that your preference might change over time, even with the same share, so be ready to change strategies.

If you are a beginner investor, this is what Adrian Reid suggests you take into consideration when choosing an order type: 

"When you first start trading and investing, market orders are the logical place to start because they are simple to understand, all brokers have them and you will definitely get your trade executed. Quickly though you will realize that market orders alone are insufficient. The key is to match your order type to your trading strategy and use the best order type for your situation. All traders and investors should certainly be aware of market, limit, stop, stop-limit, market-to-limit, and trail-orders. This will empower you to execute your trading strategies more effectively and reduce your need to watch the market moment by moment.

 When selecting a broker, be sure to check the range of order types each broker supports and what fees they charge for complex order types. This is a key differentiator between brokers and will make a real difference to your trading in the long run."

Where to look for more?

If you want to learn more about how to buy shares online, check out our articles on the topic!

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Eszter Zalán
Author of this article
Eszter is a former Editor and Financial Journalist for BrokerChooser. She wrote and edited BrokerChooser's content from 2021 onwards, bringing her more than a decade-long experience in journalism to the team. She has covered world affairs and several financial crises, and dove deep into SEO and coding to make BrokerChooser's content more accessible to users.
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