Stock Market Order Types (Market Order, Limit Order, and Stop Orders)

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Before you’re ready to trade stocks, you must first understand the different stock market order types available to you. Most people are familiar with market orders but aren’t aware of other choices that may lead to higher gains.

There’s a right and wrong time to use each order type, and understanding all three and when to use them can help you reach your investment goals.

What’s a Market Order?

A market order is an order to buy or sell a stock right away at the next available price. There is no guarantee at what price the transaction will take place. It all depends on how quickly the order takes place, which in a best-case scenario should be immediately.

How do Market Orders Work?

You should place market orders during market hours (9:30 AM to 4:00 PM EST). Your goal is to buy or sell the stock at its current price. As a seller, you look at the ‘bid’ price and as a buyer, you look at the ‘ask’ price. You’ll also see the last traded price, but it may not be current since stocks change every second. I caution you not to look at or use that price, especially with highly active stocks since they may have traded so fast that the last traded price may not have caught up yet.

Most market orders that are placed within market hours execute instantly, giving you the closest price to the market price you saw when you initiated the trade.

What’s a Limit Order?

A limit order specifies at what price you will buy or sell your stock. You can place a buy limit order with a specific price you want to pay for the stock, and your order will be executed if the stock hits the price that you set. Likewise, you can place a sell limit order with a minimum price you want to sell your stock, and your stock will be sold if the price of the stock hits that limit price.

The order only takes place if your limit price is hit. If the price that you set is not reached, you your limit order will not be executed.

How do Limit Orders Work?

Here’s how a limit order works.

Let’s say, for example, a stock’s current price is $150 per share, but you feel like it will go down. You only want to buy the shares when the stock drops to $140 per share. You can set up a buy limit order and if the stock drops to $140 or lower, your order is immediately executed. If it never reaches the target price, then you won’t buy the stock.

You can also place a sell limit order. You’d do this if you think the price of the stock will increase and you don’t want to sell at the current market price. Using our above example of stocks at $150 per share, let’s say you think the stock will increase to $160. You can set up a sell limit order at $160. This means that you’ll continue owning the stock until it goes up to $160 or higher. When the stock hits $160 or higher, your limit order will be executed.

There’s a caveat though – there’s no guarantee your order will go through. Limit orders are placed on a first-come, first-serve basis. If there aren’t enough shares to go around, you may not get your order filled. And lastly, there is a chance that your limit price may never be reached – causing your order to never be filled.

What are Stop Loss Orders?

A stop order (also called a ‘stop loss order’) is a combination of a limit order and a market order. The stop order states that if a stock reaches a certain point, the stock should be traded at the market price. If the stock doesn’t hit the stop price, there’s no order to execute.

How do they Work?

A stop order for sellers offers a level of protection. It gives sellers a chance to say ‘sell the stock if it hits this price’. You’d use it if you felt like stock prices might fall.

For example, if your stock is trading at $150 right now, but you see some news that tell you that the stock will fall, you can protect your investment by setting up a stop order at $140. This will limit the amount of money that you will lose if the stock does indeed fall. If the stock hits $140, your order becomes a market order and trades at the next available price.

As a buyer, you’d use a stop order if you think prices might rise. You can create the stop order to grab the stock at a specific price and then enjoy the ride up as the price increases.

Using our $150 per share example, let’s say you set up a stop order at $160. If the stock takes off, your stop order will be triggered when the stock hits $160. The stop order automatically becomes a market order and will be executed at the next available market price.

What’s a Stop-Limit Order?

To take it one step further, your stop order can also become a stop-limit order. Like I mentioned above, a stop order turns into a market order when the stop price is met. However, with a stop-limit order, once the stop price is met, the order will turn into a limit order. Instead of just triggering a transaction at the market price like a regular stop order, a stop-limit order has a stop price and a limit price. They can be the same or different.

In order for the transaction to take place, both the stop price and limit price must be met. If only the stop price is met, but the stock doesn’t hit the limit price, you won’t buy or sell the stock, depending on the situation.

Final Thoughts

Trading stocks requires a lot of decisions. Having help is important so you don’t make emotional or impulsive decisions when the market makes big shifts – which it does very often. You can control at what prices you buy or sell by setting up specific orders rather than just going with market orders for all your trades.

Most stock traders start off with market orders, but work their way into more specific orders to control their returns. While you can’t control what the stock market does, you can control how your portfolio reacts to each change by setting up specific limit and stop orders to reach your investing goals.