Whether you’re getting into stocks or crypto, there are a few different order types you’re likely going to see when you use your trading platform of choice. They can seem complex at first, but when you look at how they are commonly used, and what your personal investment strategy is, you should be able to put them to work for your portfolio.
Market Orders
Market orders are the most straightforward and relatively simple orders of all, and they are usually where traders and investors begin their order creation education. Market orders are unique in that they do not have hard price limits like most other order types. They are generally considered an immediate order and will execute as quickly as possible at market price.
Market Buy
A market buy is a simple buy order that will execute a buy of the specified asset at either a predetermined rate or a specified number of shares. The order will execute immediately at whatever the current market price is, and will usually be the easiest and fastest orders to fill at the market.
When This Order Is Useful
If an investor wants to go long on investment in 1,000 shares of company XYZ, for example, and acquire ownership of shares in that company immediately, they will submit a market buy order for 1,000 shares. When this fictional market order is submitted, there are 900 shares available at $10, but then the bid changes, and the final 100 shares are filled at $11.50, the investor will have paid a total of $10,150 for the order.
This works the same way if someone decides to invest a specific fractional amount in a particular asset, which has become incredibly popular in the micro-investing app communities. If someone wanted to buy $1,000 of the fictional XYZ company and submitted the market buy order, there may only be 90 shares available at a $10 bid, at which point the final $100 is filled at a share price of $11.50, leaving the investor with a total fill of approximately 98.69 shares, instead of the nice, round 100 they were likely planning on.
Market Sell
A market sell is an immediate sell order that will take the current market bid price and fill until the order conditions are satisfied. This is generally used when someone wants to short a company, and either immediately realize potential gains, or immediately mitigate and stop potential losses.
When This Order Is Useful
Market sell orders are sometimes referred to as “panic selling” orders since they are a very “I’ll take whatever you’ll give me” kind of order. Though they can also be very functional and handy for riding, buying momentum as well, rather than stopping that momentum with a limit order.
For example, if someone held 1,000 shares of fictional XYZ at an average price of $10 each, and want to get out of their investment before a new restructuring plan goes into effect while the share price is still $50, they may want to sell immediately and get whatever they can get for them.
This investor places a market sell order for 1,000 shares, and it fills the first 900 shares at $50, but then the bid moves to $49.50, and the final 100 shares fill at that price. The nature of the market order means that the investor will only see a total of $49,950 on that order.
Limit Orders
Limit orders differ significantly from market orders in that they do not allow execution until the limit price has been reached or exceeded, depending on the terms of the order. While market orders will fill at whatever the current market conditions are, limit orders put far more control in the hands of the investor or broker submitting the order.
The limit order’s primary functionality is to ensure a specified entry or exit point that is as good or better than the set limit price. These orders are most often used by those who have predetermined their entry and exit strategies and are trading in a relatively volatile market. These are also used when the price may have a wider bid-ask spread than the investor’s risk tolerance can allow.
Fill Or Kill
Fill or kill (FOK) orders is essentially a combination of an immediate-or-cancel order and an all-or-none order. These orders are directed to be executed immediately at a specific price or at market value. If it can not be filled, the order is canceled. These orders ensure that the completed position is executed in its entirety in a timely manner. When large orders aren’t executed promptly, market disruption is not uncommon due to significant changes in the price of the stock.
When This Order Is Useful
Fill or kill orders are the most helpful when large quantities are ordered. This guarantees that you’ll get the value you’re looking for if it is available, otherwise you’re free to make different choices regarding your investment. This is often used as a robust way to realize gains on large numbers of shares in a bullish market without diminishing market momentum.
Immediate Or Cancel
An immediate or cancel order is similar to the fill or kill, but it does not require the entire order to be executed. With these orders, the goal is to either buy or sell as much of the order as possible immediately. Anything that remains unfilled is canceled. Investors do have control over what conditions allow the order to be canceled and how long the order will actively be in the market.
When This Order Is Useful
IOC orders are generally used in order to avoid having an array of prices on a large order. Whatever portion is not filled immediately is canceled automatically. This is another type of limit order that is often used for large amounts or blocks of shares, to avoid any price variance from the limit set.
For example, if someone wants to invest heavily in XYZ, but they want to ensure that their price per share stays at an exact value, an IOC order allows that. An order that was submitted for 50,000 shares at a limit price of $45 could partially fill 35,000 shares before the price moved, and the leftover 15,000 on the order would simply be canceled.
Good Till Canceled
Good ‘til canceled orders are for buying and selling, and they remain active until it is canceled by the investor or the order is completed. These orders are generally limited to an active time of up to 90 days, although not all brokerages have this stipulation. A GTC order is common when traders are looking to cut down on the amount of time they spend managing their portfolio from day to day. The downside to these orders is that there is the risk of orders being filled at inconvenient times, such as temporary volatility.
When This Order Is Useful
GTC orders are handy when you want to buy or sell at a certain price, but you’re willing to wait for the value to change. This is a perfect order for those looking to either buy or sell once the order gets to a particular price, to either enter or exit an investment usually.
For example, someone who has seen a steady rise in the price of XYZ recently may want to get on board but wants the price to recede just a few dollars so that they get a better average. They can submit an order to buy 1,000 shares at $47.50, and when the price dips enough the order will fill at $47.50 or lower.
Stop Orders
Stop-loss orders come in two varieties, a sell-stop-loss order and a buy-stop-loss order, and they are both useful in their own ways. Generally used as a safety net to either prevent the loss of unrealized gains or stop the potential for runaway losses on short positions, they are advanced orders that have multiple variables involved in their creation and execution.
Sell Stop
Sell stop orders function by executing a sell order at the current market price when the price falls below the limit price set by the investor. It is generally leveraged when an investor thinks the price of an asset will fall, and that if it falls to a certain level (the limit price) then it will likely continue to fall even further. The market strategy behind this order is to limit expected losses if the market turns bearish.
When This Order Is Useful
Sell stop orders help investors protect their long positions in a highly volatile or suddenly fast-moving bearish market. The underlying investment strategy for this order is to prevent more significant losses in the value of the assets than the investor anticipates.
For example, if an investor owns 100 shares of XYZ that were bought at an average price of $50 per share and has now risen to a value of $80, the investor will want to protect those profits the best they can. Setting a sell stop order at $76 will help them protect against potential profit loss if earnings news or other factors start to move the price downward significantly.
Buy Stop
Buy stop orders are the natural counterpart to the sell stop order process and are used to buy assets that the investor has sold short. They are used to protect the investor’s shorts by purchasing shares of the underlying asset if the price rises above a set threshold, to help offset potential losses due to short-selling.
When This Order Is Useful
The buy stop order is useful in helping an investor who has sold short 100 shares of company XYZ at an average price of $10, for example. The investor has a strategy that the underlying asset, XYZ, will decrease in value, allowing them to realize the gains of the price differential.
The risks of this strategy are partially mitigated, however, when market forces cause the price of XYZ to then rise at a predetermined rate or to a predetermined price target and the order triggers. This allows the investor to hedge against potentially catastrophic losses in some cases. Advanced trading platforms even have the option to buy if the price moves at a higher rate or volatility than allowed.
Stop Limit
Stop-limit is a sell order that functions very closely to stop-loss orders. As you might suspect, the name indicates that there is a limit on the execution price for the order. There are two components needed to create a stop-limit order, the first is the stop price which is the price that changes the stop order to the sell order, and the second is the limit price, which is the minimum price that the sell order can be executed at.
The downside is that once the order is changed from a stop order to a limit order, there is no guarantee going forward that the order will be able to be filled at the limit price set. This will be particularly true if the asset value is experiencing a high degree of volatility, meaning it is seeing very large or rapid changes in value within the trading day.
When This Order Is Useful
Sell-stop-limit orders are most useful when the price of the asset is currently below the desired limit price, but the investor is willing and able to wait for the price to rise. The premise is that the investor is confident enough in the asset that they are betting the price will rise enough to surpass the limit price and trigger the sell order, helping the investor to realize gains.
They are most useful when a specific price is desired on a particular asset since the order can guarantee that price. The downside is that the order may not be executed immediately or even at all. In a fast or volatile market, this can leave an investor holding heavy bags if the order isn’t filled before the price moves too far. They can be submitted in either day orders or GTC orders.
Trading Order Overview
Getting into trading and investing can seem a little intimidating at first, especially when you look at all of the potential order types that you can create. But when you learn about each one and consider how it can lend value to your investing or trading strategy, you’ll be able to enter functional and smart orders in no time. Make sure you always consider your risk tolerance when making your limit orders so that you can keep your investments and profits as safe as possible.
John S. Logan has been working with cryptocurrency for nearly as long as it has been available on the market. With a professional background in the finance industry, he believes that blockchain technology, cryptocurrency, and decentralized finance play an important role in the future of the world.
