Order Types: Limit, Market & Stop Orders Explained

In the financial markets, “orders” refer to the instructions that investors and traders provide to their brokers to execute transactions. An order instructs the broker to buy or sell a security, which may involve opening a new position or closing an existing position.

Order types are standardized, which means investors and traders can choose from a wide range of order types when executing transactions in the market. Some order types are extremely basic, such as a “limit order” or “market order.” However, other order types are more complex, and conditional in nature. For example, a “stop order.”

After an order is submitted to a broker, the broker can fill the order from its own inventory, or route it through a computer trading network. Orders can be conveyed to brokers in person, over the phone, or online.

Orders can be cancelled at any time after they are placed—assuming the order hasn’t already been filled. After an order is executed, the broker then provides a confirmation to the customer which lays out the pertinent details, such as date, time, price and quantity.

There are a wide variety of order types, but the most commonly utilized orders in the stock market are limit orders, market orders and stop orders.

There are four primary time-in-force order types:

1. Good-til-cancelled (GTC)
2. Immediate or cancel (IOC)
3. Fill or kill (FOK)
4. All or none (AON)

For example, a good-til-cancelled (GTC) order is an order to buy or sell a stock that lasts until the order is completed, it expires, or it is canceled. Brokerage firms typically limit the length of time an investor can leave a GTC order open. This time frame may vary by broker.

In addition to GTC orders, other time in force orders include “immediate or cancel” (IOC), “fill or kill” (FOK) or “all or none” (AON).

An IOC is an order to buy or sell a security that attempts to execute all or part immediately and then cancels any unfilled portion of the order. An FOK instructs the broker to execute a transaction immediately and completely, or not at all. An AON designation also indicates that the entire size of the order must be filled, and that partial fills will not be accepted.

A limit order is an order that instructs the broker to buy or sell a specific security at a specific price. That means the order will only be executed if the broker is able to fulfill the order according to the specified price.

A buy limit order can only be executed at or below the limit price, while a sell limit order can only be executed at or above the limit price. Limit orders may result in partial fills, whereby the broker is able to execute a part of the order, but not the complete order.

If the market price fails to match (or better) the limit price while the order is active, the limit order will not be executed. All limit orders are automatically cancelled at the end of the trading session if not executed, unless they are assigned a time in force designation (i.e. good-til-cancelled).

A limit order is an order that instructs the broker to buy or sell a specific security at a specific price. That means the order will only be executed if the broker is able to fulfill the order according to the specified price. Limit orders can result in partial fills.

A buy limit order can only be executed at or below the limit price, while a sell limit order can only be executed at or above the limit price. Limit orders may result in partial fills, whereby the broker is able to execute a part of the order, but not the complete order.

For example, if a trader is looking to buy stock XYZ but has a limit of $12.50, the trader will only buy the stock at a price of $12.50 or lower, when using a limit buy order. If the trader is looking to sell shares of XYZ’s stock with a $16.50 limit, the trader will not sell any shares until the price is $16.50 or higher, when using a limit sell order.

Looking at limit order example, imagine a trader wants to buy Apple (AAPL) stock but believes its current valuation at $170/share is too high and would like to buy the stock if it falls to a lower price.

The trader instructs his broker to buy 100 shares of Apple if the price falls to $150/share using a good-’til-canceled limit order. If the stock drops to $150, the broker will purchase 100 shares for the trader at $150/share or better. Because it is a good-til-cancel order, the order will remain open until it is executed, it expires, or it is manually cancelled by the trader.

Additionally, the trader would like to sell (to close) Netflix (NFLX) stock, but feels the current price of $330/share is too low. The trader instructs his broker to sell 200 shares using a good-til-cancel limit order at $400/share. That order will only fill at $400/share or better. And cecause it is a good-til-cancel order, the order will remain open until it is executed, it expires, or it is manually cancelled by the trader.

A stop order is an order to buy or sell once the stock has traded at-or-through a specified price (e.g. the "stop price"). When the stop price is reached, the order automatically turns into a market or limit order.

Buy stop orders are placed above the market price at the time of the order, while sell stop orders are placed below the market price. As such, stop orders are typically used to mitigate risk against potential losses, or to capture potential profits.

Stop orders can be deployed as stop-loss or stop-limit orders. A stop-loss order triggers a market order when a designated price is hit, whereas a stop-limit order triggers a limit order when a designated price is hit.

A stop order is an order to buy or sell once the stock has traded at-or-through a specified price (e.g. the "stop price"). When the stop price is reached, the order automatically turns into a market or limit order.

Buy stop orders are placed above the market price at the time of the order, while sell stop orders are placed below the market price. As such, stop orders are typically used to mitigate risk against potential losses, or to capture potential profits.

Stop orders can be deployed as stop-loss or stop-limit orders. A stop-loss order triggers a market order when a designated price is hit, whereas a stop-limit order triggers a limit order when a designated price is hit.

Stop-loss orders are used for risk-managment purposes, and often for closing orders.

A stop order is an order to buy or sell once the stock has traded at-or-through a specified price (e.g. the "stop price"). When the stop price is reached, the order automatically turns into a market or limit order.

Buy stop orders are placed above the market price at the time of the order, while sell stop orders are placed below the market price. As such, stop orders are typically used to mitigate risk against potential losses, or to capture potential profits.

Stop orders can be deployed as stop-loss or stop-limit orders. A stop-loss order triggers a market order when a designated price is hit, whereas a stop-limit order triggers a limit order when a designated price is hit.

When the stop price is reached, a stop-loss order automatically turns into a market order, and is executed as soon as possible at current market prices with the intent of minimizing losses.

Alternatively, a stop-limit order will transform into a limit order when the stop price is reached.

Stop-loss orders guarantee execution if the position hits a certain price, whereas stop-limit orders can only be executed at the specified price or better.

Imagine an investor or trader bought 100 shares of hypothetical stock ABC for $20/share. The investor believes the stock will go up, but wants to protect against extensive losses if the stock goes down.

To mitigate against those potential risks, the investor deploys a sell stop-loss order in ABC to sell 100 shares of ABC for $18/share.

If ABC drops to $18/share or lower, the sell stop-loss order will be triggered, and the order becomes a market order to sell 100 shares of ABC. The price at which the order ultimately fills will depend on liquidity in ABC, the bid-ask spread and prevailing market conditions.

If the investor is more sensitive to price, and less sensitive to execution speed, he/she might instead deploy a stop-limit order to sell 100 shares of ABC at $18/share. In this case, the stop-limit order is triggered if ABC drops to $18/share, at which point the order transforms into a limit order to sell 100 shares of ABC for $18/share or better.

A market order is an order to buy or sell a stock at the market's current best available price. Generally speaking, a market order virtually guarantees execution, but market orders do not guarantee a specific price.

In that regard, the fill price of a market order will depend heavily on trading volume. If the security in question trades with robust liquidity, and a tight bid-ask spread, then a market order may fill at-or-near the market quote.

However, if liquidity in the market is insufficient, then a market order may get filled at a price that’s further away than what was indicated by the market quote. This is especially true if the market order in question involves a large quantity, or if the order is placed in a fast-moving market.

Choosing an order type will depend on the market environment and one’s intended goal in placing the order. Market orders are extremely efficient in terms of execution speed.

If an investor or trader needs a quick fill, a market order may be suitable, because these orders are filled as quickly as possible. However, the price of the fill can vary depending on market conditions and associated trading volume in the security.