Types of Orders

Once you’re ready to start investing in stocks, you must understand the many terms associated with placing orders. This is especially critical in today’s market where most people place trades online and there is no interaction with a broker. While trading online does provide you with a greatly reduced commission, the drawback is that you are 100% responsible for the trade. If you are not fully aware of what a particular order or qualifier means, you could end up with a very different outcome than what you were expecting. This course takes you through the basic terms you will encounter when placing your first trades.

Making the Trade

Whenever you buy or sell stock, you must specify five basic pieces of information:

  • Action (Buy or Sell)
  • Quantity (Number of shares)
  • Symbol (Ticker symbol)
  • Price (Market or Limit)
  • Time (Day or Good-til-Cancelled (GTC))

The action, quantity, and symbol are all straightforward and really don’t need any detailed explanation. These fields are simply telling your broker whether you wish to buy or sell, how many shares, and of which security. But the price and time fields are the ones that create the most questions – and unexpected surprises – for new traders so that’s what we’re going to focus on in this course. Each of these orders carries a different set of possibilities and, depending on the situation, one will probably be a better choice than the other. We’ll go through each so that you understand them fully.

Price

When you place an order to buy or sell, you must provide some information about the price at which you’re willing to make the deal. There are two basic ways to provide price information: market order or limit order.

Market Order

A market order guarantees that your order will be filled (or “executed”)  but does not guarantee the price at which the transaction will be made. If you place an order to buy 300 shares of Intel “at market,” then you know for sure that you have purchased 300 shares. But in order for this transaction to be guaranteed, it means that you must be flexible on the price. The reason you must be flexible on price is because stock prices change nearly every second of the day; they do not stay constant throughout the day or week such as when you’re shopping at a retail store. If the stock’s price is $25 when you place your order, it’s quite possible that your purchase price will come back at a different price (whether higher or lower) than $25 even though it will only take a few seconds for the trade to get filled. When you place a market order, you’re really stating that you want to be filled at the best price (which is the prevailing price at that moment) when your order reaches the trading floor. The simplest way to describe a market order is this: A market order guarantees the execution but not the price.

New traders often wonder why they cannot guarantee that the deal goes through but at a predetermined price. After all, whenever you buy a house or car, you can guarantee the deal at a stated price. The reason for the apparent inconsistency is due to the fact that the stock market is one continuous live auction where traders place bids to buy and offers to sell.

The stock’s price depends on the supply and demand of the stock at that moment in time. If you place an order “at market,” you’re telling the broker to fill the order but the price at which the order is filled depends on the time your order arrives. There is no way to be sure to get the shares while also stating a maximum or minimum price. Think about it this way: Imagine that you are a buyer for a billionaire who sends you to an auction to purchase a Picasso painting. There is no way he can tell you to definitely come back with the painting but to not spend more than $10 million. If the painting must be purchased, the buyer must be flexible on price.

Liquidity

Whenever shares of stock are traded, the number of shares gets recorded and tallied up throughout the trading day. The total number of shares traded at any time is reported as the volume.

Some stocks have a lot of daily volume while others are thinly traded. Stocks that have a lot of volume are said to be highly liquid. If you place a market order for a liquid stock, you will most likely get filled at a price very close to the one you see on your computer screen when placing the order.

Of course, this assumes that the number of shares you’re trading doesn’t represent a significant part of the daily volume. For example, you could place an order for 10,000 shares of Microsoft or Intel, which are both highly liquid, and probably get filled at a price very close to the one you saw when you placed the order. But if you buy 10,000 shares of a stock that has almost no daily volume, such as many penny stocks, you could be in for a big surprise when the fill comes back. It’s always important to understand the size of your order relative to the liquidity when deciding whether to place a market order or not.

Fast Markets

No matter how liquid the stock, it is possible for a lot of traders to rush in with orders at the same time thus making the quote you see somewhat stale. (By the way, stale quotes can happen even though you may be looking at “real time” quotes.) When quotes are stale, the condition is called a “fast market” and can happen to any stock regardless of liquidity.

However, the more liquid the stock, the less severe the price swings will be during a fast market. A fast market is one where trade orders are flowing so fast that the market makers cannot accurately quote the true price based on all buy and sell orders. Fast markets usually occur when there is a big news announcement or event and many traders rush in at the same time to place orders. During a fast market, there can be long lines of orders to get filled and, by the time your order reaches the front of the line, the stock price could be very different from what you thought you were going to get.

It is important to understand that a market order carries no implied or “reasonable” limits. Even though most market orders are filled at prices close to the current price, there are no guarantees. There are no minimum prices (for sell orders) or maximum prices (for buy orders). You cannot come back to your broker and say, for example, that the stock price was $25 when you sent the order and a fill price of $27 is unreasonable. If you place your order during a fast market, an “unreasonable” price becomes a possibility.

Multiple Fills

If you place a market order, it is possible that the order comes back filled at multiple prices. This just means the traders were only able to get a certain number of shares at one price and had to fill the balance at one or more prices.

For example, assume Microsoft is trading for $30 and your order is to buy 500 shares of Microsoft at market. It is possible that your order comes back as follows: bought 200 shares at $30 and 300 shares at $30.10. When you are filled at one or more prices, it is called a multiple fill. These happen for the sheer fact that market orders must fill and, just as there’s no guarantee as to the price, there’s also no guarantee that the price will be the same for all shares traded.

Despite the small risk of adverse price movements, if you must get in or out of a trade, then the market order is still your best choice. It is the only way to be sure you receive the execution. However, there may be times when you want to ensure that your buy price does not rise past a certain point or that your sell order does not fall below a certain price. If so, then you can use another type of price called a limit order.

Limit Orders

A limit order is one where you specify a price. If you are buying shares of stock, your execution price cannot exceed your stated limit price. If you are selling shares of stock, the execution price cannot fall below your stated limit price. If your stated limit price cannot be transacted then your order remains open, which means it is possible you never get filled. Limit orders guarantee the price but not the execution.

For example, if you place an order to buy 300 shares of Intel at a limit price of $25, then the order will only be filled if the market maker can fill it for $25 or less. If your order is to sell 300 shares of Intel at a limit price of $27.50, then the order can only be filled for $27.50 or higher. If the stock price never reaches $27.50 then the trade goes unexecuted.

It is important to understand that just because the stock’s price may trade at your limit price ($27.50 in this example) does not necessarily mean your order will get filled. The reason is that there are other orders ahead of yours. If another trader has an order to also buy shares at $27.50 but placed it before you then he has priority according to time. Each trade is “time stamped” so that orders with the same limit price are sorted according to time. So just be aware that you may see a “last trade” of $27.50 but that does not mean that everybody in the world who wanted to transact stock at that price may do so. There are only so many shares available at any given price.

Most traders use limit orders to buy stock at a lower price (or sell it at a higher price) than the current market price. If Intel is $25 per share and you think its price will fall in the near future, you might place a trade to buy shares at a limit of $23.50, for example. That way you’ll have a standing order on the books if the price should hit $23.50. If the stock never hits that price (or lower), the trade goes unexecuted.

Limit orders are a great tool for discipline. If you just purchased 200 shares for $25 and wish to sell them when it hits $30, you can immediately place an order to sell 200 shares at a limit of $30. The only way the trade will get executed is if the stock’s price hits $30 or higher. The reason this is a good discipline tool is that the stock’s price may continue to rise above $30 and it will be very tempting to continue holding hoping for more profit. However, if you don’t really think the shares should be worth much more than $30, placing an order ahead of time keeps you from hanging onto stocks at prices you feel are too high. The computer has no emotions; when the stock’s price hits $30, it will sell.

Why Can’t I Guarantee the Execution and Price?

It is important to understand that when you place orders you can either guarantee the execution (market order) or the price (limit order) but you cannot guarantee both. Why can’t a trader guarantee both the price and execution? That would be too good to be true. If we could guarantee both, we would be guaranteed to buy an expensive stock for a very low price and guaranteed to sell it for a very high price, which is simply not possible. You only get one choice between price and execution. If you must have the order executed then use a market order and be flexible on price. If you must have a certain price, then use a limit order and accept the risk of not getting filled. You can only guarantee the execution or the price.

Or-Better Orders

The price risk associated with market orders leaves some traders uncomfortable especially if they have a relatively small account and do not wish to risk having to send in additional money to pay for a trade. Placing a limit order alleviates this risk but then you run the risk of not getting filled. Is there some way to blend the two orders? Is there a way we can be reasonably certain of getting filled but, at the same time, not be at risk for a price we might find unsatisfactory?

The answer is yes and we can do that with an “or-better” qualifier. An or-better qualifier is a type of limit order where your buy price is stated above the current market price and your sell limit is placed below the current market price.

For example, assume that Microsoft is trading for $30 and you want to buy 200 shares but do not want to be totally flexible on price. You could place an order, for example, to buy 200 shares at $31 or-better. This means that you are willing to pay up to $31 per share even though the current price is $30.

This order qualifier gets its name from that fact that you are willing to buy the shares at $31 or a better price, which is lower. Some new traders think the “or better” qualifier is suggesting that you will buy the shares at $31 “or higher” and that’s not true. That would be better for the seller, not you. You’re telling the broker you’ll buy for $31 “or better” for you.

By using the or-better qualifier, if the price should move up a bit after you send the order, at least you’ll get filled assuming the price doesn’t move above $31. The or-better qualifier allows for some price fluctuation between the time you send the order and the time it is filled. Of course, this is still a type of limit order so it is possible (although unlikely) that you do not get filled. By using the or-better qualifier, you have a much better chance of being filled as compared to a trader that places a marketable limit at $30 per share.

You can use or-better qualifiers on the sell side too. If Microsoft is $30 and you place an order to sell shares at $29.50 or-better, you could get filled for any price at $29.50 or higher. The or-better designation on the sell side just tells the broker you’re willing to take less than the current market price if necessary to get the trade executed.

How do you place an “or-better” order? When entering an or-better order online, most firms require that you check off a little box that says “or better” so they know that you are willing to buy above the current price (or sell below the current price). The reason they require you to check off the box is because, otherwise, they’re not sure if you mean to sell the stock (since most traders would place a limit order above the current price if they are selling the stock). By checking off the or-better box, it lets your broker know that you are not making a mistake in the order.

Other firms do not require you to check off any box designating that it is an “or-better” order. Simply placing your buy order above the market will suffice. Using the previous example, if Microsoft is $30 and you place an order to buy 100 shares at $31 (or any price higher than $30) the broker assumes it is an “or-better” order.

Some traders find or-better orders a little unsettling to use. They feel that the market makers will take advantage of them and fill the order at the higher price. That’s not true since the market makers are bound by the “time and sales,” which is a recording of all sales (trades) and the times they occurred. Market makers cannot arbitrarily fill your order at the higher price just because you’re willing to pay it. They could only do so if the “time and sales” recording shows that was the going price for the stock at the time your order was filled.

Limit Orders and Quantity

Another fact about limit orders is that you are really stating to buy or sell up to that many shares at the limit price. If you place an order to buy 400 shares of Microsoft at $30, you could get filled for any number of shares up to 400 (minimum lots of 100 shares).

Your order is filled for fewer shares than you requested, it is called a partial fill. With a stock as liquid as Microsoft, it is unlikely that the market makers could not fill all 400 shares at any given price but it is a possibility. The less liquid the stock or the faster the market, the more likely it is that you may get a partial fill.

All-or-None (AON)

If you do not wish to get a partial fill, you can place an all-or-none (AON) restriction on your order. This is simply done by checking off the AON box when you enter the trade. This just tells the market makers to not fill your order unless they can fill the entire number of shares you requested. While this may sound like an advantageous restriction to place on all orders, there are many drawbacks.

First, your order is handled differently and market makers are not required to show your orders to the public if they are marked AON. This means that you will reduce your chance of getting filled. Second, multiple fills are not a possibility with AON orders. For instance, assume you place an order to buy 500 shares of a stock at $20. It’s possible that all 500 shares are filled but at different times of the day. However, if you marked the trade AON, then you may never get any shares filled. Third, you must ask yourself if a partial fill is really a bad outcome. Will you be upset that you only bought 300 out of 500 shares if the stock shoots up 10 points? There are times for AON restrictions but, for most traders, it acts as a hindrance. It usually does more harm than good.

If you choose to use an AON restriction, make sure you are placing it on an order that is relatively large. An order to buy 500 shares of Microsoft is so small relative to the number of shares traded daily that an AON restriction is probably never needed. But if you wanted to buy 20,000 shares of Microsoft at a particular price then an AON would be warranted.

Time Limits

In addition to setting a price when entering your order, you must also specify a time limit for which the order is good. This is true for any bid to buy or offer to sell. If you place a bid on a new home and the seller rejects it, he or she cannot come back a week later and force you to accept it. There is only so long that a bid or offer can stand.

In the same way, when you place an order to buy or sell stock, you must specify for how long the order is valid. There are two basic choices for time limits: Day Order and Good-til-cancelled Cancelled (GTC). There are two others, which are Immediate or Cancel (IOC) and Fill or Kill (FOK) but those are rarely used, especially if you are new to trading. For this course, we’ll only consider the “day order” and GTC.

Day Orders

A day order is good only for the trading day. If you place a day order after the market close, then it will be good only for the following business day.

If you place a “market” order then it must also be a “day order” for the fact that market orders are guaranteed to fill. There is no reason that the order would roll over to another day. Most computer programs will automatically select the “day order” time limit if you enter a market order. However, if it doesn’t and you manually select GTC, the order will likely be rejected since it raises questions for the floor traders; they are not sure if you meant to use a limit order or meant to make the time period good for the day.

We just found out that a day order is the only acceptable time limit for a market order. However, if you enter a limit order, then the “day” time limit makes the trade only good for the trading day and is cancelled at the end if it is not filled. If you wish to reenter the trade, you must retype a new order and submit it.

Good-til-Cancelled Orders (GTC)

Good-til-cancelled order may only be used for limit orders. As stated in the previous section, market orders are guaranteed to fill so there is no reason to request that the order remain open past the current trading day. Good-til-cancelled orders can be a handy tool that keeps you from having to retype orders that do not fill. If a GTC limit order does not fill today, it will automatically renew itself the following business day.

A GTC order is good for a period of time designated by your broker. Most brokers allow the order to stand between 30 and 90 calendar days (not trading days); however, some allow them to stand indefinitely or until you cancel them.

GTC Partial Fills

If a GTC order is filled in its entirety, it is considered executed and will not be reinstated the following day. If the order is never filled throughout the GTC time period, it is then cancelled for good.

However, we said earlier that limit orders imply that you are willing to buy or sell up to the number of specified shares. Because of this, it is possible to receive a partial fill on a GTC order.

For example, assume you place an order to buy 1,000 shares of Microsoft at a limit price of $30 GTC. Further, assume your broker allows the order to stand for 90 days. This means you are willing to buy up to 1,000 shares at a price not to exceed $30 per share over the next 90 days.

Let’s say that 20 days later, the stock’s price drops to $30 but that you are only filled on 400 shares. You would receive a confirmation that you have purchased 400 shares at $30 and now have an open order to buy the remaining 600 shares at $30 GTC (which will now be good for the next 60 days). It is important to understand that time remaining on the GTC order starts when you place the original order; the time does not reset because of a partial fill.

It is equally important to understand is that just because part of the order executes does not mean that the remainder is cancelled. If you wish to cancel the remaining shares, you must do that separately.

Pros and Cons of GTC Orders

Good-til-cancelled orders can simplify your life by automatically renewing trades that do not fill. However, GTC orders can also be a source of trouble if you forget about them. Using the earlier example, assume you place an order to buy 1,000 shares of Microsoft at a limit of $30 GTC. Let’s also assume that the order hasn’t filled after several months and that your broker allows a GTC order to stand for six months.

 It’s possible that the stock’s price may start to fall rapidly several months later and you forget that you still have this open order on the books. The stock could fall well below $30 – and fill your order on the way down. Alternatively, you may forget about the order and then place an entirely new order thus doubling up on the order. It is because many traders forget about open GTC orders that most brokers only allow them to stand for only 90 days or less. Still, 90 days is a lot of time for things to change in the stock market. If you use GTC orders, it’s important to check your account for any GTC orders on a routine basis.

Change/Cancel

If you have placed any limit order and wish to change it, you must enter a change/cancel order. This is true whether you placed a day or GTC time limit. For example, let’s assume you bought stock at $30 and placed a sell limit order at $35 GTC. At a later time, the stock hits $34 but appears to hit some resistance and you decide to sell for $34. Many new traders make the mistake of entering a new order to sell the shares for $34 and forget that they still have an open order to sell for $35.

In this case, there are two choices you have. First, you can cancel the GTC order. After it is cancelled, you can then place the new order to sell for $34. Second, most brokers allow you to enter a change/cancel order. You would simply tell the computer to change the GTC order. It will allow you to change several fields such as number of shares and the time limit. It will probably not allow you to change the action or the stock symbol. Once the order appears, you would just change the limit order from $35 to $34 and then enter that order. This tells the computer to change the order from $35 to $34 assuming it is able to cancel the original order. If the original order is confirmed cancelled, then the new limit at $34 stands. By using the change/cancel feature, it will prevent you from doubling up on your orders.

You generally cannot cancel a “market” order once it has been placed. Once again, the reason is because the order is guaranteed to fill. I have seen cases where market orders were cancelled but this was due to a delay between the time the broker sends the order and the time it was sent to the floor. You can certainly try to cancel a market order, but no broker is required to allow you to cancel it.

Stop and Stop Limits

“Stop” and “stop limit” orders are generally used to exit a trade although they could certainly be used to enter one. These are the two types of orders that cause more confusion than any other – even among brokers. Make sure you understand their differences before using.

A “sell stop” is used if you already own the stock. Sell stops are used as a risk management tool because it will sell your stock if the price falls but allow you to hang on if it should rise.

To place a sell stop order, you place an order to sell your shares and designate a “stop price” in the order. The stop price is nothing more than a “trigger” point at which the order is activated (which is technically called elected). Once the stop price is triggered, the order becomes a live market order to sell the shares.

For example, let’s assume you bought 300 shares of stock at $50 and wish to limit your losses to no more than $1 per share, or $300 total. In other words, if the stock’s price hits $49 you’d like to sell. After buying the shares, you could enter a stop order to protect your downside. The order would look like this:

Sell 300 shares at a stop price of $49

In addition, you’d have to specify a time limit, which is either a “day” or “GTC.” If the stock should rise you still own the shares and profit from the additional price increases. However, if the price falls to $49 or lower, the trade becomes a live “market order” and you are sold at the prevailing price.

This brings up an important point about stop orders – they do not in any way guarantee that you will receive $49. Remember, a market order is guaranteed to fill and, because of this, it cannot guarantee the price. The stop price of $49 is really a “trigger point” where the order is activated if the stock hits $49 or lower.

In most cases, if the stock price falls slowly and eventually hits $49, you should have no trouble getting that price. But let’s say the stock closes at $49.01 today and opens at $45 tomorrow. In that case, you’re going to get a price closer to the prevailing $45 price. So contrary to popular belief, stop orders do not guarantee that they will limit your losses to a specified limit.

Stop Limits

Continuing with the previous example, let’s say the stock does open the next day at $45. Your $49 stop price would be triggered and you’d disappointed to find your order filled near $45.

Suppose you feel that if the stock’s price did hit $45 that you’d rather hold it rather than sell it. Is there a way you can prevent selling it for too low of a price below your $49 stop price?

The answer is yes and you accomplish that by using a “stop limit” order. To enter a stop limit order, you submit two prices to your broker. The first is the stop price, which serves the same function as a regular stop order. It is simply the trigger point to activate the order. However, the second price is a limit price and the order must be executed at that price or higher.

For example, if you wish to sell your stock at $49 but would rather hold it if you cannot get at least $48, you could place a sell stop limit, which would look like this:

Sell 300 shares at a stop price of $49 with at stop limit of $48

As with any stop order, you can make it good for the day or until cancelled. This order says to activate the order if the stock trades at $49 or lower but only if you can get $48 or higher.

As with the stop order, the $49 price acts as a trigger point. If the stock trades at that price or lower, the order is activated and becomes a live “limit order” to sell if you can get $48 or higher.

So in this example, if the stock opens at $45, you’ll still end up holding the stock. Notice that in both cases – the stop and stop limit order – that you are never guaranteed to prevent a loss. For instance, if the stock trades at $45, you’d sell your shares at $45 with a regular stop order and have a definite loss. With the stop limit order, you’d still be holding the shares but would have an unrealized loss (it’s only a loss once it’s sold below your purchase price).

The main different is that with the stop limit order that at least you’re not going to sell the stock at a price at which you’d rather hold the shares.

One word of caution: In this example, you’ll still be holding the shares at with a current market price of $45; however, the order has now been triggered since the stock traded at $49 or lower. Therefore, you now have a live order to sell if the stock rises to $48 or higher while the GTC order is active! If you decide that you don’t want to sell the stock, you must cancel the order.

Despite these risks, stop and stop orders are generally seen as helpful risk management tools. It’s easy to say that you’ll sell your shares if the price hits $49 but, in most cases, people hang on hoping to get their money back – and often end up losing more. Stop and stop limit orders create disciplined approaches to risk management.

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