Market, limit and stop orders: choosing the right order type

An order type is the instruction you give your broker about how and at what price to buy or sell. The choice comes down to a trade-off: you can usually be more certain of getting filled, or more certain of the price, but not both. Knowing which one each order type protects makes it much easier to avoid surprises.

The four common order types

Market orders are the simplest. A buy fills at or near the current ask and a sell at or near the current bid. In a liquid stock during regular hours that is usually close to the quote. In a thin or fast-moving stock the fill can be noticeably different. See bid, ask, spread and liquidity.

Limit orders let you name a price. A buy limit sits below the current ask and waits for sellers to come down to it. A sell limit sits above the current bid and waits for buyers. If you set a buy limit at or above the current ask, it simply fills right away at the ask or better.

Stop orders are dormant until the market touches the stop price. A sell stop is placed below the current price and a buy stop above it. Once triggered, a plain stop becomes a market order, so it fills at whatever the market offers.

Stop-limit orders add a limit price to the stop. They avoid a terrible fill, but they can leave you holding the position if the price blows through your limit.

A trailing stop is a stop whose trigger follows the price by a set amount or percentage and does not move back the other way. Brokers differ on exactly how a stop is triggered (last trade, bid or ask, for example), so check how yours works.

Time in force

Every order also has a lifespan.

• Day: expires at the end of the regular session if not filled.
• Good-til-canceled (GTC): stays active until filled or canceled, usually subject to a maximum period that varies by broker.
• Immediate-or-cancel and fill-or-kill: fill what can be filled right now and cancel the rest, or fill everything now or cancel. Brokers may offer these, mainly to active traders.

Whether an order can trade outside regular hours is a separate setting. See pre-market and after-hours trading.

Example (illustrative numbers)

A stock shows a bid of $49.95 and an ask of $50.00.

• Market buy of 100 shares: fills at about $50.00. If the ask moves between your click and the execution, the average could be a little higher.
• Buy limit at $49.50: waits. It fills only if sellers come down to $49.50 or lower. If the stock climbs instead, the order never fills.
• Sell stop at $45 on shares you own: if the stock trades down to $45, a market sell order is released. Now suppose bad news arrives overnight and the stock opens at $42. The stop triggers at the open and sells near $42, not $45.
• Sell stop-limit with stop $45 and limit $44: triggers at $45 but will sell only at $44 or better. In the same gap down to $42 it would not fill, and you would still own the shares at $42.

None of these outcomes is wrong. Each does exactly what it was designed to do.

How to choose: rules of thumb

• For a small order in a large, liquid stock during regular hours, a market order is usually fine because the spread is tiny.
• For thin stocks, wide spreads, volatile moments such as the first minutes after the open, or any extended-hours trade, a limit order gives control over price.
• Use stop orders only when you understand the gap risk. The pros and cons are covered in stop-loss orders.
• Match order size to your plan. How much to buy is a separate decision, discussed in position sizing.

Common mistakes

• Assuming a stop guarantees an exit price. It guarantees only that an order is released once the trigger is hit.
• Using market orders when the market is closed or thin. Many brokers require limit orders in extended hours for this reason.
• Placing a limit price so far away that it never fills, then watching the stock move without you.
• Setting stops inside normal daily swings. A stop that sits within a stock's ordinary range can be triggered by routine noise. Average true range is one way to gauge that range.
• Forgetting open GTC orders, which can execute weeks later in very different conditions.
• Typing errors. Check the side, quantity and price on the preview screen before sending.

Key takeaways

• Market orders favor getting filled; limit orders favor price.
• A stop order turns into a market order when triggered, and a stop-limit turns into a limit order.
• Gaps, which are jumps in price between one trade and the next, can make stop fills very different from the stop price.
• Time-in-force settings decide how long an order stays alive, so review them as carefully as the price.