Finding your feet as an investor but thrown by some of the lingo? Here’s what you need to know about the different types of stock market orders, such as “stop loss” and “limit”, and how to use them to help you avoid making expensive mistakes.
A trading order is an instruction you give your trading platform or broker when you want to buy or sell an investment. It allows you greater control because you can set a pre-programmed command. Then, your trading move happens automatically when a price hits the target you’ve specified, meaning you don’t have to sit in front of a screen all day watching prices go up and down and waiting for the right moment to buy or sell.
You’ll usually pay a fee for certain types of order, which tend to be the more sophisticated ones such as take-profit. Carrying out a trade is known as “executing” an order.
The 3 main orders are: market, limit, and stop orders. But, there are some crossovers and variations within the broader categories.
This is the most straightforward type. It’s an instruction to make your trade at the next best available price on the market.
In practice, this next available price could be higher or lower than what you were expecting. Sometimes by a little, and sometimes quite a lot. Stock markets can move quickly and the difference will depend on the volatility and the time of day you make the trade. This difference is known as “slippage”.
Typically, market orders are the quickest to fulfil, because it’s an easy way to match up buyers and sellers. But, a market order means you forfeit direct control over the trade price.
A market order is a good option if you want to make a quick trade and you’re not bothered about getting the absolute best deal.
When you select this, you set a price limit on how much you’re willing to buy or sell an asset for. This means a maximum price for buying or a minimum price for selling.
The order will only be fulfilled if it can take place at the limit you’ve set, or at a better price if possible.
This gives you more control over the exact exchange price. But, the trade won’t happen if your target isn’t met.
This is a friendly relative of the market order. The difference is, you set a specific target price at which the trade converts into a market order.
Instead of carrying out a trade for an immediate price the market throws your way, you have more control. Depending on whether you’re looking to buy or sell once a price target is met, you can use a buy-stop or sell-stop.
If you’re setting a stop order, it must be higher than the current price for a buy order and lower than the current price for a sell order.
A sell-stop order is often referred to as a “stop-loss” order and it can help limit potential losses if prices are plunging.
This combines a stop order and a limit order to really zero in on your ideal price.
You open the trade by setting 2 prices: an upper and lower level for your trade to work within. The stop price will be your starting target for the trade, and then your limit will be the outside price target.
It’s also common to specify a time frame for the trade. The most common time restrictions to use are “day” or “good-til-cancelled” (GTC).
A major benefit is that this type of order can give you the best of both worlds, limiting your downside or locking in profits within a range you’re comfortable with.
The drawback is that if the price moves up or down by a big chunk, falling outside your range before it’s filled, the trade won’t execute.
For this type, you can set your price to move without exiting your trade.
To start, you select a percentage or pound amount that’s different to the market price. Then, choose if you want the trailing stop order to convert into a market or limit order.
If the trade is working out as you hoped, you can continue to profit as the price moves. But, if the wind blows the other way, this order attempts to close the trade when the price reaches your specified difference.
This is similar to a limit order, except there’s no guarantee on the price. You set a price beforehand, then, if the asset hits it, the trade automatically converts into a market order.
Doing this helps speed up a trade, but could still lead to slippage. Because, you only control the price that triggers the conversion to a market order. The best market price could then move as the broker attempts to execute.
You can also use an “LIT” to convert your order into a limit rather than a market order.
You set your price when opening the trade, and once that’s hit, the trade shifts into a limit order. But, if no one is willing to buy or sell at your price, it’s possible the trade won’t fully execute. It’s possible that your platform may be able to execute some of the trade – for example if you want to buy 50 shares and your platform holds 20, it might sell you those.
This does exactly what it says on the tin. A trade will automatically close and take profit once it reaches a specific price level that you’ve set.
If the price never hits your target, the trade won’t execute.
To look at this another way, we’ve set out a few trading scenarios that show each type of order in action. We’ve used the ticker for Apple stock, which is AAPL.
| Trading order type | When to use |
|---|---|
| Market | You’re looking to make a quick trade, buying AAPL shares at the latest price. |
| Limit | You want to buy AAPL stock, but only for a certain price. If it costs more than that, you’re not interested. |
| Stop | You set a sell-stop/stop-loss price to limit your losses. If the AAPL price falls to that level, your broker sells at the next available market price. |
| Stop-limit | You set a sell-stop/stop-loss price but only to sell your shares within a specified range. This helps to avoid slippage. Ideal if you’re willing to keep holding AAPL stock if you can’t get your desired price. |
| Trailing stop | You buy AAPL stock, confident the price will rise. So, you set a trailing stop order that moves automatically as the price goes up. |
| Market-if-touched | You’re happy to sell your AAPL stock as quickly as possible once it touches a certain price. You don’t mind if the price moves further, you just want out of the trade as soon as possible. |
| Limit-if-touched | You want to sell your AAPL stock if the price goes below a certain level, but only for a price you’re happy with. If you can’t get that price, you will hold on to your shares. |
| Take profit | You want to sell your AAPL stock if it goes up by an exact percentage. Locking in your trade action without any price flexibility. |
Using these controls can feel daunting when you first want to make a trade. So, here’s a brief step-by-step guide on the basic way to use trading orders:
First, you need to decide what you want from the trade. Here are a few simple questions to run through:
Pros
Cons
Using different types of trading orders means you get more control over trade prices, but with great power comes great responsibility. The flexibility means it’s up to you to select the right stock market order type, or it could be a costly mistake.
We outline how pre-market stock trading works and why you might want to buy or sell stocks before markets officially open.
Find out exactly what a stock split and a reverse stock split means, why they happen and what impact it has on the price of shares.
We explain the different account types that you’ll come across when signing up with an investment platform.
Find out the key characteristics of a bull market and whether it’s a good time to invest.
Market cap is an important measure of a company’s total value on the stock exchange.
Find out how trading volume works and how it can be an important tool to monitor investing trends.
SPACs are a unique way for companies to float on a stock exchange. Find out how they work and how SPACs differ from IPOs.
Futures contracts, also known as just “futures”, are a derivative that let you speculate on the price movements of commodities, stock indices and currencies.
What makes a business a public limited company?
Options trading offers the right to buy at a certain price on or before a certain date. They’re different from futures as there isn’t an obligation to buy so you can “lock in” a price without having to worry about fulfilling a contract.