Types of Stock Orders: Market, Limit and Stop Orders

Despite variances in fees and features across different brokerages, there is consensus on the different stock order types that investors can place on the exchanges.

Market Orders

What is a Market Order?

A market order is probably one of the most common methods utilized by investors when starting out.

As the name suggests, when a market order is submitted, it aims to execute on the prevailing market price and fill the order on the ask in case of a buy or take liquidity by hitting the best bid for a sale.

Fills can be reasonable for highly liquid instruments (index futures) or large-cap stocks (AAPL).

However, caution needs to be exercised while dabbling in illiquid, small/micro-cap names that may have wide bid/ask spreads with the potential of significant slippage during execution.

When to use a Market Order?

Market Orders may not be as harmful as investors might fear them to be.

With sufficient trading experience, investors can develop a feel for securities that are reasonably liquid with healthy depth in the order book where market orders are filled quickly without any significant slippage.

Market orders are best utilized in periods of low volatility in highly liquid names to execute without much risk.

On the contrary, it is highly recommended to avoid market orders after any macro event or economic data release such as CPI, non-farm payrolls and Fed interest rate decisions.

But if the investor wants to express a particular view with high conviction, then market orders are your friend to set up those trades in volatile markets. 

Example of a Market Order

In the price quote above, MCL represents the Micro Crude future for the June expiry.

A market order placed to buy 4 lots will execute immediately for $99.18 and any sale will be done at $99.17 for up to 2 lots.

Depending on the liquidity in this particular security, market orders for large size may execute at levels that are away from the last traded price of $99.18.

Limit Orders

What is a Limit Order?

A Limit Order protects against slippage (filling an order at an adverse price while executing the order) by placing a cap on the maximum amount an investor is willing to pay in case of a buy order or the minimum amount an investor would be okay with receiving in case of a sell order.

However, if market conditions change and a more favourable price level can be obtained, then most brokers attempt to fill at those price levels.

In the event that the market turns and runs the other direction, then the order will sit there waiting to be executed until the price comes back to those levels to execute the trade. 

When to use a Limit Order

Limit Orders are great for new and experienced traders alike.

They can pinpoint the exact point for entering/liquidating trades.

Large money managers and market technicians focus on long-term support levels to initiate entries and hone in on resistance levels to liquidate positions.

By specifying the price to enter into a trade, investors can size appropriately and manage risk effectively. 

Did You Know?

Berkshire Hathaway (BRK.A) was up 51% in after-hours earlier last year as someone executed a market order and got a fill substantially higher than the closing price, showing how risky market orders can be in an illiquid or thinly traded security.

Example of a Limit Order

In the price quote above, a limit order is entered to buy MCL at $98.25 while the security is trading at $98.34/98.35.

The only way this limit order gets executed is if the price comes down and is offered for $98.25.

Until then, the limit order stays within the market remaining unexecuted.

Guy researching stock order types on phone

Stop Orders

What is a Stop Order?

A Stop Order executes a buy or sell market order when a predetermined stop price has been breached.

This can be used to contain losses or realize gains to close the position.

Generally, stop orders are placed below strong points of support or resistance to protect the stop from being triggered by market noise and random volatility.

Having said that, algos and other market participants view stop orders as potential pockets of liquidity, triggering stop runs in thinly traded overnight sessions.

When to use a Stop Order

It is highly recommended to size positions appropriately and use the corresponding stop orders to protect the downside in the event that the investment thesis goes bad.

The only reason not to use a stop would be for short-term trades based on an event such as unemployment numbers or inflation data,as the markets whipsaw and struggle for direction moments after the release, where even if the initial thesis might be correct, a speculator may get stopped out due to the heightened volatility infused into the markets.

Example of a Stop Order

Here we have the Nasdaq futures for the June 2022 expiry and an example of a Stop Order.

Based on the inputs above, this will initiate a market sell once the price touches 13,269.25 on the Nasdaq.  

Stop Market Order

Similar to the Stop Order, a Stop Market Order will execute a market order when a predetermined price threshold is breached.

The Stop Market Order has an embedded stop order and it is exposed to all the risks associated with market orders as a result.

Such orders are good at cutting losses as they take an investor out of a losing trade at a set interval, but the losses can exceed expectations due to the nature of market orders.

A good example of a stop market order is listed below wherein if Crude slips below $96.39, it will trigger a market sell order.

Stop Limit Order

Similar to a Stop Order, a Stop Limit Order will place limit orders when a certain price level is touched.

The benefit of a Stop Limit Order is that it attempts to reduce slippage when executing the stop-loss order at a predetermined price.

However, in fast-moving markets, such limit orders might not get filled and the loss can be quite substantial if the price moves against the investor.

In the following stop-limit order, if the S&P 500 goes above 4,231.25, then it will execute a point higher at 4,232.25 and buy the position back (assuming the initial position was short the S&P 500 index futures).

Limit Order vs Market Order

The main difference between a limit order and a market order is that a limit order can exercise control on the price the order gets filled at in contrast to market orders which can get filled at any price depending on the underlying liquidity in the traded security.

Market orders are great to accumulate positions without fussing over pennies, especially for investors looking to get invested and stay invested over the long-term.

For market participants investing for a shorter time horizon, they can hone in on the levels to enter the trade and scale out of their position using limit orders to manage risk as well as take profits at appropriate levels.

Frequently Asked Questions

  • What is good for a day market order?
  • Is a stop loss a limit order?
Sid Mohapatra

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.