Order types

Investors must specify how a trade should be carried out when they place an order to buy or sell a security. This chapter covers four order types:

• Market orders
• Limit orders
• Stop orders
• Stop limit orders

Market orders

Market orders are used when the main goal is an immediate execution. A market order does not specify a price. Instead, it executes at the next available market price. In practice, market orders often fill within seconds.

When you place a market order, execution is guaranteed (the trade will happen), but price is not guaranteed (you don’t control the exact fill price). This creates risk, especially if you place a market order when the market is closed.

Assume an investor places a market order to buy stock in a pharmaceutical company after the market closes, when the stock is $50. A few hours later, a news article about the company curing cancer is published, and the stock opens the next day at $200. If the investor’s order is still active at the open, they’ll buy at about 4x the price they expected. While extreme examples are rare, overnight price movement is common.

The risk also applies to selling. Using the same $50 stock, if a customer places a market order to sell after the close, the stock could drop significantly overnight, leading to a sale at a much lower price. For this reason, investors generally avoid placing market orders overnight.

When an order is placed, customers must also specify how long it stays active. Most orders are either day orders or good-til-canceled (GTC):

• Day orders are canceled at the end of the trading day if they haven’t executed.
• GTC orders remain open until the customer cancels them (which could be days, weeks, or months).

Market orders are designed to execute immediately, so broker-dealers typically default them to day orders.

Here’s a video that dives further into market orders:

Limit orders

Limit orders are used when price matters. Unlike market orders, limit orders guarantee that the trade will occur at a specific price or better. However, they do not guarantee execution.

Let’s walk through a few examples.

Buy 100 shares of ABC stock @ $50 limit

Trading tape: $51.03… $51.01… $49.99… $49.98… $50.01…

The investor wants to buy 100 shares of ABC, but won’t pay more than $50 per share. The order executes once the stock trades at $50 or lower. The trading tape shows available prices for the security from left to right. Here, $49.99 is the first price at $50 or below, so the order fills at $49.99.

Investors often use limit orders to try to get better prices. For example, if a stock is trading at $55, a customer could place a buy limit at $50. The order will only execute if the price falls to $50 or lower.

Let’s see if you can answer a buy limit order question.

Buy 100 shares @ $75 limit

Trading tape: $75.02… $75.03… $74.97… $75.00… $75.01…

At what price does the order go through?

Here’s a video that dives further into buy limit orders:

Let’s look at a limit order from the sell side:

Sell 100 shares of XYZ stock @ $70

Trading tape: $69.95… $69.98… $69.99… $70.01… $69.99…

At what price does the order go through?

If a price is specified and nothing else is added, it’s assumed to be a limit order (even if the word “limit” isn’t written). This is a sell limit order, meaning the customer wants to sell at $70 or higher. The order executes once the stock trades at $70 or above. Here, $70.01 is the first price at $70 or above, so the order fills at $70.01.

Let’s see if you can answer a sell limit order question.

Sell 100 shares @ $30

Trading tape: $30.05… $30.02… $29.99… $29.97… $30.01…

At what price does the order go through?

Here’s a video that dives further into sell limit orders:

Limit orders may take time to execute. Because of that, they can be placed as either:

• Day orders, which cancel at the end of the day if unexecuted, or
• GTC orders, which remain open until the customer cancels them.

Stop orders

Stop orders (often called “stop loss” orders) can feel a little backward at first:

• A buy stop triggers when the price rises.
• A sell stop triggers when the price falls.

So why would someone buy at higher prices or sell at lower prices? Stop orders are commonly used to limit losses or to enter a position only after the market moves to a certain level.

Let’s start with a sell stop.

Long 100 shares of ABC stock @ $50

Investor places a sell 100 shares of ABC stock @ $45 stop

Sell stop orders trigger when the market price falls to the stop price or below. When the order triggers (also called electing), it starts the execution process. Here, the order triggers if ABC falls to $45 or lower. The investor is using the stop to limit losses to about $5 per share.

Long 100 shares of ABC stock @ $50

Investor places a sell 100 shares of ABC stock @ $45 stop

Trading tape: $45.02… $45.01… $44.99… $44.97… $45.01…

Stop orders follow a two-step process:

1. Trigger: The order triggers when the market reaches the stop price.
2. Execute: After triggering, the order becomes a market order and fills at the next available price.

In this example, the order triggers at $44.99 (the first price at $45 or below). After triggering, it becomes a market order and executes at the next available price, $44.97.

Because a stop order turns into a market order after it triggers:

• Execution isn’t guaranteed (the order might never trigger).
• Price isn’t guaranteed (once triggered, it fills at the next available price, which could be above, at, or below the stop price).

Let’s check your understanding of sell stop orders.

An investor goes long 100 shares of stock @ $80. They place a sell 100 shares @ $78 stop order.

Trading tape: $79… $80… $78.50… $78… $79…

At what price will the order trigger? At what price will the order execute?

Here’s a video that dives further into sell stop orders:

Buy stop orders are commonly used as “stop loss” orders for short stock positions. If you need a refresher, see shorting a security. Investors with short positions use buy stops to limit losses if the stock price rises.

Sell short 100 shares of ABC stock @ $80

Investor places a buy 100 shares of ABC stock @ $90 stop

Buy stop orders elect (trigger) when the market price rises to the stop price or above. Here, the order triggers if ABC rises to $90 or higher. The investor is using the stop to limit losses to about $10 per share.

Sell short 100 shares of ABC stock @ $80

Investor places a buy 100 shares of ABC stock @ $90 stop

Trading tape: $89.97… $89.99… $90.02… $90.01… $89.98…

The order triggers at $90.02 (the first price at $90 or above). After triggering, it becomes a market order and executes at the next available price, $90.01.

Let’s check your understanding of buy stop orders.

An investor goes short 100 shares of stock @ $20. They place a buy 100 shares @ $21 stop order.

Trading tape: $20.70… $20.90… $21. 10… $20.50… $20.85…

At what price will the order trigger? At what price will the order execute?

Here’s a video that dives further into buy stop orders:

Like limit orders, stop orders can be day or GTC orders. If placed as a day order, the order is canceled if it remains unexecuted by the end of the day. If placed as a GTC order, the order stays open until executed or canceled by the investor.

Stop limit orders

Stop limit orders combine features of stop orders and limit orders. A stop limit order is a stop order that becomes a limit order after it triggers (elects). The key difference between a stop order and a stop limit order is what happens after the trigger.

Stop limit orders are used for the same reasons as stop orders (often to limit losses), but they appeal to investors who want more control over price. Because the order becomes a limit order after triggering, the investor gets a price condition.

Let’s look at an example.

Long 100 shares of ABC stock @ $30

Investor places a sell 100 shares of ABC stock @ $25 stop $23 limit

To understand a sell stop limit order, focus on the stop first:

• The sell stop triggers when the market falls to or below the stop price ($25).
• After triggering, the sell limit controls execution: the order can fill only at $23 or higher.

Long 100 shares of ABC stock @ $30

Investor places a sell 100 shares of ABC stock @ $25 stop $23 limit

Trading tape: $25.03… $25.01… $24.99… $24.98… $24.95…

The order triggers at $24.99 (the first price at $25 or below). After triggering, it becomes a limit order and can execute as long as the market is $23 or higher. The next available price that meets that condition is $24.98, so the order executes there. The limit portion ensures the customer won’t sell for less than $23 per share.

Let’s see if you understand a sell stop limit.

An investor goes long 100 shares of stock @ $70. They place a sell 100 shares @ $65 stop limit order.

Trading tape: $65.10… $64.90… $64.95… $65.05… $64.85

At what price will the order trigger? At what price will the order execute?

Here’s a video that dives further into sell stop limit orders:

Let’s take a look at a buy stop limit order:

Sell short 100 shares of ABC stock @ $70

Investor places a buy 100 shares of ABC stock @ $77 stop limit

Again, focus on the stop first:

• The buy stop triggers when the market rises to the stop price or higher.
• After triggering, the buy limit controls execution: the order can fill only at the limit price or lower.

Sell short 100 shares of ABC stock @ $70

Investor places a buy 100 shares of ABC stock @ $77 stop limit

Trading tape: $76.95… $76.99… $77.02… $77.01… $76.98…

The order triggers at $77.02 (the first price at $77 or above). After triggering, it becomes a limit order and can execute only at $77 or lower. The next available price that meets that condition is $76.98, so the order executes there. The limit portion ensures the customer won’t buy for more than $77 per share.

Let’s see if you understand buy stop limit orders.

An investor goes short 100 shares of stock @ $25. They place a buy 100 shares @ $28 stop $29 limit order.

Trading tape: $27.97… $28.01… $28.09… $27.90… $27.50…

At what price will the order trigger? At what price will the order execute?

Here’s a video that dives further into buy stop limit orders:

Just like limits and stops, stop limit orders can be day or GTC. If placed as a day order, the order will be canceled if it doesn’t execute by the end of the day. If placed as a GTC order, the order will stay open until executed or canceled by the investor.

Conclusion

It’s important to keep track of where the market must go for an order to trigger or execute. Many people use “SLOBS” and “BLISS” to remember how these order types work. The following visual is useful to memorize and re-write on your scratch paper during the Series 66 exam:

Using this visual:

• Sell limits are above the line, meaning they execute when the market price is at or above the limit price.
• Buy limits are below the line, meaning they execute when the market price is at or below the limit price.

Stop orders don’t execute immediately. They trigger at specific market prices:

• Sell stops trigger when the market price is at or below the stop price.
• Buy stops trigger when the market price is at or above the stop price.

In case you were wondering, the “O” in “SLOBS” and the “I” in “BLISS” are included to make the acronyms work.

Key points

Market orders

• Transaction request at the next possible price
• Guarantees execution, not price
• Always day orders

Day orders

• Cancelled at end of the day if not executed

GTC orders

• Cancelled when customer requests

Limit orders

• Seek better prices for investors
• Guarantee price, but not execution
• Day or GTC orders

Buy limit orders

• Execute when the price falls to or below the limit price

Sell limit orders

• Execute when the price rises to or above the limit price

Stop orders

• Typically utilized to “stop losses” on stock
• Do not guarantee price or execution
• Trigger (elect) first, then execute
• Become market orders after they trigger
• Day or GTC orders

Sell stop orders

• Trigger when the price falls to or below the stop price

Buy stop orders

• Trigger when the price rises to or above the stop price

Stop limit orders

• Normal stop orders up until the trigger
• After trigger, becomes a limit order
• Day or GTC orders

Orders placed above current market

• Sell limits
• Buy stops

Orders placed below current market

• Buy limits
• Sell stops

DNR (do not reduce) orders

• Never adjusted for cash dividends