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Stock Market Order Types - Types of Stock Orders

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 6/29/2011

Trading stocks sounds simple enough. Open a brokerage account and then enter your orders to buy or sell stocks. Look closer and there are actually several different types of stock market order types. A User Guide to Stock Market Orders is…well, in order.

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    Stock Market Order Types FAQ User Guide

    Types of Stock Orders

    Every stock market trade order either is a buy or sell order. While some brokerage platforms, particularly those of top online brokerage firms have ways to enter complex orders that are composed of both buy and sell instructions, those are just a user interface that makes it easier to input the various buy orders and sell orders that make up the more complicated orders.

    For every buy or sell, there are types of instructions that make each stock trading order do certain things in order to meet the investor’s needs. Any Frequently Asked Questions, or FAQ of Order Types starts with the most basic stock market order.

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    Market Orders

    Market orders are the basic stock order you probably think of when you think about buying or selling stocks. It is also the type of stock trade depicted most commonly in movies and TV shows where the guy is shouting into his phone, “Buy, buy, buy,” or “Sell, sell, sell.”

    The definition of a market order is a stock order that should be executed immediately regardless of the price. In other words, a market order means that they investor wants to buy or sell now. They are not trying to get a certain price. This is the fastest order possible. Market orders cannot be cancelled because they are executed immediately.

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    Limit Orders

    A limit order is a stock market order directing your broker to buy or sell stock at a specified price or better. An investor can use a buy limit order to only buy stock if the price is below the limit or use a sell limit order to sell stock only if the price is above a defined price per share.

    Buy Limits are always less than the current price per share.

    Sell Limit orders are always for more than the current price per share.

    It is important to remember that a limit order requires the price to be better at the time of the trade. In other words, if a stock trades above the limit price for a buy order, but the trade cannot be executed at that price or better, the trade will not happen even though the price was high enough for a moment.

    Contrast a limit order with a stop order.

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    Stop Orders

    Stop orders are not the same as stop-limit orders. Be sure to understand the difference between stop orders and stop-limit orders.

    A stop order is an instruction to buy or sell once the stock trades even for a single trade above or below the stop price. A stop order example, is a buy stop order for XYZ at $30 per share. In this case, the buy order becomes a market order once XYZ trades at $30 or lower at any time, even if executing the order means that the price at execution will be higher.

    Thus, stop orders are subject to whipshaws or other temporary market conditions.

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    Stop-Limit Orders

    To avoid the problem of stop orders, investors may use stop-limit orders.

    A stop-limit order is actually a combination of a stop order with a limit order. Unlike a stop order which becomes a market order once the stop price is reached, a stop-limit order becomes a limit order once the price is reached. While a stop-limit order can be entered with the stop price and the limit price being the same, it is not required.

    Thus, a stop-limit order to buy at $30 per share becomes a limit buy order once the stock has traded at $30 per share or below. However, unlike a stop order, the trade will not execute if the price goes back up before the investor’s order can be executed.

    Using a stop-limit order ensures that the price per share will not be higher than $30 under any conditions.