Stock Order Types: How To Properly Use Trade Orders

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To make the best decisions as an investor, it’s important to educate yourself on the different types of stock orders. In this article, I’ll cover some of the key stock order types, and how they can best be used to maximize your trading potential.

Before you make a trade, you need to place an order. But there are many different stock order types. Which should you choose?

To make smarter decisions as an investor, it’s important to educate yourself on the different stock order types.

Knowing and understanding the different stock order types will not only help you determine when each one is appropriate, but it can actually help reduce losses and potentially improve profits.

In this article, I’ll cover some of the key stock order types, and how they can best be used to maximize your trading potential.

What are Stock Orders?

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Before we go into the different stock order types, let’s just take a sec to define what a stock order is …

Basically, a stock order is your instructions to the broker to how you want to buy or sell a security.

However, there are many specifications that can be put on that order. Think about it like going to the coffee shop, where you can ask for soy milk, light foam, or assign any number of different personalizations to your latte. Only here, you’re tailoring it to your investment needs.

There are different stock order types which let you as the investor place restrictions on the order which can have an effect on the price, and the time of the order placement.

By choosing the appropriate order type and adjusting these restrictions, you can try to control the profit and loss on the transaction.

In some cases, you can adjust the settings so that the order will only be placed if it fits certain criteria that you have set.

Now that you have a basic understanding of stock orders, let’s dig deeper into some of the considerations you’ll keep in mind when choosing one.

Time Horizon

While it might sound like a sci-fi movie title, time horizon is actually a stock market term, and it’s relevant to stock order types.

Time horizon is the amount of time you’re holding an investment before you liquidate it.

In the case of a day trader, this can be for a very short time — sometimes mere seconds or minutes.

For a longer hold, such as a buy-and-hold position in a mega cap company that you’re counting on as part of your retirement plan, it might be years or even decades.

The time horizon has everything to do with your goals.

Before you consider any type of investment, you should familiarize yourself with the time horizon common for it. For instance, if you’re investing in a penny stock, you shouldn’t expect to be holding on to it for months or years.

The time horizon can help you chose a level of diversity and allocation that works for your portfolio.

Various things can affect time horizon. For instance, if you’re a day trader in your 20s, your time horizon might be different than someone who is in their 50s and nearing retirement.

Life factors can come into play, too. If one of your biggest goals is to save for a down payment on a house or investment property, you might have a different time horizon than someone who doesn’t have a forthcoming investment or immediate goal.

Risk Tolerance

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Your personal risk tolerance also plays a role in what stock order types you choose.

There are several different types of risk tolerance, including conservative/risk-averse, moderate, and aggressive, with many points in between.

It may be helpful to get clarity on your risk tolerance level, so that you can begin to make the most appropriate choices for you.

The stock market is never a one-size-fits-all model: A big part of the work as a trader is developing a style that works sustainably for you over time.

Stock Order Types: Examples

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Ready to learn about the different stock order types? Here are some of the key types that you’ll see, including an explanation of each and when they might be used.

Buy or Sell With a Market Order

With a market order, you’re placing an order to buy or sell right now. Market orders can be used to buy or to sell.

A market order is simple in that you are, without a doubt, definitely placing and executing the order.

However, there is no defined price. Just because an amount is listed as the most recently traded price, it doesn’t mean that you’ll get exactly that price. You’re basically buying into the current market price. So, if you were working with your broker, you might say, for example, “buy 100 shares of X at the current market price.”

For a sell order, the price usually goes off at or close to the current bid price. For a buy order, the price usually does the same. However, it’s not totally guaranteed.

Online, a market order will be executed nearly instantly.

However, even nanoseconds can have an effect on the price of the stock, so even if you looked at the price moments ago there can be variance in what you pay or make from the sale. This is particularly true if there’s a lot of volume around the stock.

In general, you can expect that with a market order, you’ll pay the highest price out of all the sell orders on the table, and you’ll get the lowest price out of buy orders.

When To Use Market Orders

As a trader, you know that entry and exit matters a lot. So with the fact that you’re not guaranteed a price, when should you consider a market order? Here are some times when it makes sense:

If you want to buy in fast. If you really want to get into a trade and speed is more important than price, a market order might fit the bill. However, be aware that it can be a risky tactic to be so desperate to buy a stock based on a hot tip or something that you need to have it right now.

If you want to cut losses. If you’re stuck in a hard position with a stock and you want to cut losses quickly, you can use a market order and get out ASAP.

If the range is narrow. If there’s not a huge amount of movement with the stock, then a market order is less likely to vary dramatically from the ask bid or sell price, so it’s not as much of a worry.

Buy or Sell With Limit Orders

A limit order adds a few more restrictions to the basic buy or sell market order to lock in specific prices.

Basically, the limit order will only be bought or sold if the price reaches your desired level. It has to reach the limit price or lower for buying, and the limit price or higher for selling.

So, if you’ve been scanning the prices and determined what your desired entry is, you can set the limit order and only execute the trade if it reaches that point. If it doesn’t, the trade won’t be executed.

When to Use Limit Orders

Here are some of the opportune moments to use limit orders:

When you have a specific entry/exit in mind. Since the limit order allows you to only buy if the price reaches or exceeds what you specify, that makes sense when you want to have a firm entry and exit.

You want to buy below market price. If the current market price is higher than you want but you think it will go lower, a limit order might allow you to get the price you want.

You want to sell above market price. If the current market price is lower than the amount you want to make, you can set a limit order for the sale in hopes of getting a higher price.

Of course, in the last two scenarios, you have to be very careful to set reasonable numbers, because if they aren’t reached you might lose out on the trade entirely and lose your window.

Stop Sell and Stop Buy Orders

A stop order, also known as a stop-loss order, is an order type where you will buy or sell a stock when it reaches a specified price. That’s called the stop price. Once the stop price has been reached, the stop order is executed as a market order.

A buy stop order is when the trade is entered at a stop price which exceeds the current market price. A sell stop order is when the trade is entered at a stop price which is lower than the current market price.

Trailing Stop Order

It’s similar to a stop-loss order in that it’s designed to protect you from losses. But it works a little differently. A trailing stop order allows you to set your order a specific percentage away from the stock’s market price.

It offers more flexibility than the stop-loss order, which is fixed and would need to be manually reset.

One of the biggest benefits of a trailing stop is that it lets you specify how much you’re willing to lose, but it doesn’t put a cap on how much profit you can take.

You can learn more about the trailing stop in this post.

When to Use Stop Orders

When should you use a stop order? Here are some situations where it can be advantageous:

If you can’t be near your computer. If you find yourself in a situation where you might not be right on top of the trade, a stop order is a great way to protect your assets.

If things are volatile. If you’re trading a particularly volatile stock or something like a cryptocurrency where the price could change very quickly, a stop order can help you limit losses and maximize profits.

If you want to protect profits on a short sale. A lot of investors use buy stop orders to maximize profits on a short sale.

If you want to limit losses. Particularly when selling, investors want to limit their losses. A sell stop order can help do that.

Additional Order Types for Trading Stocks

These are some other stock order types and distinctions you might encounter and should at least know about:

All or None (AON)

An ‘all or none’ (AON) is a specification you can place on your buy and sell order. It directs the broker to either fulfill the order to the letter, or to not fill the order at all. For instance, if you want to buy or sell 100 shares and not all of them are available, the order will be canceled.

With an AON order, you give instructions about how the order will be filled, which has an effect on how long the order is active.

Whether or not an AON is fulfilled depends on various factors. For instance, a stock that has a lot of movement and a lot of shares is often less likely to provide any problems.

However, if you’re placing a bigger or more substantial order, it might be harder to fulfill because you’re taking up a bigger amount of the shares traded during the trading day.

Good ‘Til Canceled (GTC)

As casual as it may sound, yes, this is an official order type.

A ‘good ‘til canceled’ (GTC) order is when you place an order to buy or sell a stock that stays active until the order is filled or you cancel it.

Don’t take the name too literally, though. They actually don’t remain active or unclosed forever.

Usually, the order will have an expiration date of 30 to 90 days after it’s placed. This keeps you as the investor from being surprised by a charge after you thought it was over and done with.

The idea behind GTC orders is that if you’re not able to constantly monitor stock prices, you can place your order, set it at a specific price point, and keep it open for a few weeks.

This means that you have a lot of freedom. If the price reaches your desired point within a finite period, the trade will go on.

It’s also possible to place GTC orders as specifications on stop orders. In those cases, the prices will be below or above the market prices, so that you can limit losses and maximize profits.

Why place a GTC? Once again, you want to maximize your earning potential, but don’t have time to stay right on top of it. You can place the GTC order. If it happens, it happens; after a while, you might cancel it or it will expire.

One wrinkle? GTCs can be a little harder to come by.

According to Investopedia, “Several exchanges, including the NYSE and NASDAQ no longer accept GTC orders, including stop orders. They have decided that such orders are a risk to investors who may see their orders executed at an inopportune time due to temporary volatility in the market.”

However, brokerage firms still offer the GTC order, simply handling them internally.

GTCs can carry risk when the market becomes extremely volatile. Remember, it only needs to dip above or below a certain point for the trade to be executed, even if it’s for a minute. If the price rebounds immediately, it could spell out trouble.

Day

A day order is somewhat similar to a GTC, but with a much shorter duration. This is a type of order that expires at the end of a given trading day.

The day order is an order to buy or sell a stock. Like a GTC order, it specifies the price at which a trade is executed, be it a buy or sell order. However, unlike the longer duration orders, if the trade doesn’t go through the same day, it is automatically canceled.

For many trading platforms, this is the go-to duration trading style. So if you wanted to do a longer duration like a GTC you’d have to manually do that.

Day traders often use day orders, because you can specify the specific price at which you’d like to buy or sell and that’s that. You don’t have to keep an eye on the market at all times to execute the order.

This means you can focus on doing other research or fundamental analysis to consider other trades. Since it automatically cancels if not executed at the end of the day, it’s easy to keep track of a day order.

Stock Order Tips for Successful Traders

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Ready to put these different stock order types to work? Here are some tips for optimal usage:

Get to Know the Price Restrictions You Can Place Within an Order

Not every broker handles orders in the same way. Be sure to check out your brokerage firm’s specific restrictions and fees for placing orders so that you’re not unpleasantly surprised.

Additionally, keep in mind that if you use one of the stock order types that has an automatic execute, there may be tax consequences.

Tax consequences? Yep. You might be subject to unexpected expenses like higher tax rates on capital gains.

Here’s how that might work …

In general, the capital gains taxes on assets you’ve had for less than a year are lower than an individual tax rate.

However, a stop loss order could execute a sale on a stock you’ve held for less than a year. In this case, the capital gains would be taxed at potentially astronomical rates, plus other possible surcharges. Yikes.

Understand How Stop Limit Orders Are Executed and Filled

A stop-limit order combines a little bit of the stop and a little bit of the limit order by letting you set two different price specifications.

The first one is similar to that in a stop order: the price at which you want to execute a sale or buy.

The second is the limit, which is where you cry uncle: if the stock goes above or below that, it has exited your target price, and the order is called off.

You also have to set a time frame for this to occur; it’s a finite period of time.

As a trader, one of the benefits of the stop-limit order is that you have more control over how and when the order should be filled. However, once again, if it doesn’t reach the stop, then the trade will not go through.

Understand the Time Limitations You Can Place on an Order

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Different stock orders have different time limits. As such, it’s important to familiarize yourself with the different types and the time restrictions associated with each.

Market, limit and stop orders can include time restrictions and other conditions. As such, it’s important to understand the restrictions on each, because you don’t want to be unpleasantly surprised.

For example, you may love the freedom that a GTC gives you to go on with your business and forget about it. But then again, if you actually do forget and then the trade is executed, it may not work out as you’d like.

Be sure to make notes on each different type of order and to strongly consider the order type that best suits the trade in question.

Always Seek Out More Technical Knowledge

Learning things like stock order types can seem confusing, but it will serve you well on your journey as a trader. The more technical knowledge you amass, the stronger and better informed you’ll be as an investor.

By taking trading classes, you can fast forward through learning many of the market basics like this so that you have a stronger foundation of knowledge for making investments.

This can equip you with the know-how to execute more intelligent trades, meaning that you can get yourself up to speed and work on refining your trading faster.

Master Your Skills With My Trading Challenge

I created my Trading Challenge to act as an educational resource for my students.

Not only does it include access to what is at this point an incredible bounty of video lessons that you can browse according to your schedule, but it also includes a real-time approach.

I am right there with you in the market, publicly sharing every trade on Profit.ly and constantly sharing my insight, stock tips, and commentary.

This offers you a chance to learn by doing, with guided insight on how the market works.

The Bottom Line

Getting to know the different stock order types can help you make smarter investments.

Choosing the appropriate stock order types can help you get better prices and can help ensure that you only enter trades and exit trades at points that you’ve deemed advantageous.

As a trader, you can never completely eliminate the risk factor from investing, but you can take measures to mitigate it — choosing an appropriate stock order is one invaluable technique that should be part of your repertoire.

Do you understand the different stock order types?

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