The Securities Marketplace - Types Of Orders

Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific price or condition under which the investor wants their order to be executed. All orders are considered “day” orders unless otherwise specified. All day orders will be canceled at the end of the trading day if they are not executed. An investor may also specify that their order remain active until canceled. This type of order is known as “Good Til Cancel” or “GTC”.

Market Orders

A market order will guarantee that the investor’s order is executed as soon as the order is presented to the market. A market order to either buy or sell guarantees the execution but not the price at which the order will be executed. When a market order is presented for execution, the market for the security may be very different from the market that was displayed when the order was entered. As a result, the investor does not know the exact price that their order will be executed at.

Buy Limit Orders

A buy limit order sets the maximum price that the investor will pay for the security. The order may never be executed at a price higher than the investor’s limit price. While a buy limit order guarantees that the investor will not pay over a certain price, it does not guarantee them an execution. If the stock continues to trade higher away from the investor’s limit price, the investor will not purchase the stock and may miss a chance to realize a profit.

Sell Limit Orders

A sell limit order sets the minimum price that the investor will accept for the security. The order may never be executed at a price lower than the investor’s limit price. While a sell limit order guarantees that the investor will not receive less than a certain price, it does not guarantee them an execution. If the stock continues to trade lower away from the investor’s limit price, the investor will not sell the stock and may miss a chance to realize a profit or may realize a loss as a result.

FOCUS POINT!

It’s important to remember that even if an investor sees stock trading at their limit price, it does not mean that their order was executed because there could have been stock ahead of them at that limit price.

Stop Orders / Stop Loss Orders

A stop order or stop loss order can be used by investors to limit or guard against a loss or to protect a profit. A stop order will be placed away from the market in case the stock starts to move against the investor. A stop order is not a “live” order; it has to be elected. A stop order is elected and becomes a live order when the stock trades at or through the stop price. The stop price is also known as the trigger price. Once the stock has traded at or though the stop price the order becomes a market order to either buy or sell the stock depending on the type of order that was placed.

Buy Stop Orders

A buy stop order is placed above the market and is used to protect against a loss or to protect a profit on a short sale of stock. A buy stop order could also be used by a technical analyst to get long the stock after the stock breaks through resistance.

Series 55 tutoring

Example:

An investor has sold 100 shares of ABC short at $40 per share. ABC has declined to $30 per share. The investor is concerned that if ABC goes past $32 it may return to $40. To protect their profit they enter an order to buy 100 ABC at 32 stop. If ABC trades at or through $32 the order will become a market order to buy 100 shares and the investor will cover their short at the next available price.

Sell Stop Orders

A sell stop order is placed below the market and is used to protect against a loss or to protect a profit on the purchase of a stock. A sell stop order could also be used by a technical analyst to get short the stock after the stock breaks through support.

Example:

An investor has purchased 100 shares of ABC at $30 per share. ABC has risen to $40 per share. The investor is concerned that if ABC falls past $38 it may return to $30. To protect their profit they enter an order to sell 100 ABC at 38 stop. If ABC trades at or through $38 the order will become a market order to sell 100 shares and the investor will sell their stock at the next available price.

If in the same example the order to sell 100 ABC at 38 stop was entered GTC. We could have a situation such as this:

ABC closes at 39.40. The following morning ABC announces that they lost a major contract and ABC opens at 35.30. The opening print of 35.30 elected the order and the stock would be sold on the opening or as close to the opening as practical.

Stop Limit Orders

An investor would enter a stop limit order for the same reasons they would enter a stop order. The only difference is that once the order has been elected the order becomes a limit order instead of a market order. The same risks that apply to traditional limit orders apply to stop limit orders. If the stock continues to trade away from the investor’s limit, they could give back all of their profits or suffer large losses.

Other Types Of Orders
Related Articles
  1. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  2. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  3. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  4. Professionals

    Sell-Side Analysts Need Series 86/87 Exams

    Though these tests are not particularly difficult or comprehensive, passing them is mandatory to work as a sell-side analyst.
  5. Professionals

    Succeeding At The Series 63 Exam

    Your career as a securities agent begins with this test. We'll show you how to score high.
  6. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  7. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  8. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  9. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  10. Your Practice

    How Likely is a New Fiduciary Rule in 2016?

    New fiduciary standards for advisors working with retirement accounts are on the horizon. Will they become reality in 2016?
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
RELATED FAQS
  1. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  2. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
  3. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  4. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  5. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
  6. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center