Different order types can result in vastly different outcomes, so it's important to understand the distinctions among them. Here we focus on three main order types—market orders, limit orders, and stop orders—and discuss how they differ and when to consider each.
It helps to think of each order type as a distinct tool suited to its own purpose. Whether you're buying or selling, it's important to identify your primary goal— whether it's having your order filled quickly at the prevailing market price or controlling the price of your trade. Then you can determine which order type is most appropriate to achieve your goal.
What is a market order and how do I use it?
A market order is an order to buy or sell a stock at the market's best available price. It typically ensures an execution but doesn't guarantee a specific price. When the primary goal is to execute the trade immediately, a market order is optimal. It's generally appropriate when you think a stock is priced right, when you're sure you want a fill on your order, or when you want an immediate execution.
A few caveats: A stock's quote typically includes the highest bid potential buyers are willing to pay to acquire the stock, the lowest offer potential sellers are willing to accept to sell the stock, and the last price at which the stock traded. However, the last trade price may not necessarily be current, particularly in the case of less-liquid stocks, whose last trade may have occurred minutes or hours ago. This might also be the case in fast-moving markets when stock prices can change significantly in a short period of time. Therefore, when placing a market order, the current bid and offer prices are generally of greater importance than the last trade price.
Market orders are usually placed when the market is already open. A market order placed when markets are closed would be executed at the next market open, which could be significantly higher or lower from its prior close. Between market sessions, numerous factors can impact a stock's price, such as the release of earnings, company news or economic data, or unexpected events that affect an entire industry, sector, or the market as a whole.
What is a limit order and how does it work?
A limit order is an order to buy or sell a stock with a restriction on the maximum price to be paid (with a buy limit) or the minimum price to be received (with a sell limit). If the order is filled, it will only be at the specified limit price or better. However, there is no assurance of execution. A limit order may be appropriate when you think you can buy at a price lower than—or sell at a price higher than—the current quote. The thinkorswim® chart below illustrates the use of market orders versus limit orders.
Source: thinkorswim platform
In this example, the last trade price was $149.50. Let's review the scenarios for each order type:
- A trader who wanted to purchase (or sell) the stock as quickly as possible could place a market order, which would in most cases be executed immediately at or near the stock's current price (white line)—provided the market was open when the order was placed and barring unusual market conditions.
- A trader who wanted to buy the stock only if it dropped to $144 could place a buy limit order with a limit price of $144 (green line). If the stock fell to that level or lower, the limit order would trigger and the order would be executed at $144 or less. If the stock failed to fall to $144 or less, no execution would occur.
- A trader who wanted to sell the stock if it reached $164 could place a sell limit order with a limit price of $164 (red line). If the stock rose to that level or higher, the limit order would trigger and the order would be executed at $164 or more. If the stock failed to rise to $164 or more, no execution would occur.
Note, even if the stock reached the specified limit price, the order may not fill because there may be orders ahead of yours. In that case, there may not be enough (or additional) sellers (or buyers) willing to sell (or buy) at that limit price, so your order wouldn't fill. (Limit orders are generally executed on a first-come, first-served basis.) That said, it's also possible your order could fill at an even better price. For example, a buy order could execute below a limit price, and a sell order could execute for more than a limit price.
A few words about timing
At Schwab, you have several choices for how long your limit order stays active.
- Day only.Order is active for one regular trading session only (or the remainder of the trading session if the order is entered while the market is already open).
- Good till canceled (GTC).Order is active between the hours of 9:30 a.m. and 4 p.m. ET and active for up to 180 calendar days (unless filled or canceled). Orders placed after 4 p.m. ET during the weekend or on holidays will be active the next trading day.
- Day + extended hours. Order is active during all equity trading sessions from 7 a.m. to 8 p.m. ET for one day only. Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- GTC + extended hours.Order is active for all equity trading sessions from 7 a.m. to 8 p.m. ET and is active for up to 180 calendar days (unless filled or canceled). Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- Extended-hours a.m. (Ext. AM).Order can be placed between 8:05 p.m. ET (previous trading day) and 9:25 a.m. ET. The trade, however, is active only during the Ext. AM session for that day. The Ext. AM session runs daily from 7 a.m. to 9:25 a.m. ET, Monday through Friday, excluding market holidays.
- Extended-hours p.m. (Ext. PM).Order can be placed Monday through Friday between 4:05 p.m. and 8 p.m. ET. The trade, however, is active only during the Ext. PM session for that day. The Ext. PM session runs daily from 4:05 p.m. to 8 p.m. ET, Monday through Friday, excluding market holidays.
While placing orders in extended hours is sometimes viable, traders will want to consider some of the downsides as well. First, only limit orders are accepted in extended orders; market and stop orders are not. Second, trading activity often falls sharply at the end of normal trading hours and the lack of liquidity in extended hours can pose additional risks, especially during the GTC+ extended-hours time frame. For example, an earnings report or other news event might trigger a sharp drop in the stock and fill a buy limit order, only to see the stock continue to move lower against the trader.
At Schwab, you have several choices for how long your limit order stays active.
- Day only.Order is active for one regular trading session only (or the remainder of the trading session if the order is entered while the market is already open).
- Good till canceled (GTC).Order is active between the hours of 9:30 a.m. and 4 p.m. ET and active for up to 180 calendar days (unless filled or canceled). Orders placed after 4 p.m. ET during the weekend or on holidays will be active the next trading day.
- Day + extended hours. Order is active during all equity trading sessions from 7 a.m. to 8 p.m. ET for one day only. Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- GTC + extended hours.Order is active for all equity trading sessions from 7 a.m. to 8 p.m. ET and is active for up to 180 calendar days (unless filled or canceled). Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- Extended-hours a.m. (Ext. AM).Order can be placed between 8:05 p.m. ET (previous trading day) and 9:25 a.m. ET. The trade, however, is active only during the Ext. AM session for that day. The Ext. AM session runs daily from 7 a.m. to 9:25 a.m. ET, Monday through Friday, excluding market holidays.
- Extended-hours p.m. (Ext. PM).Order can be placed Monday through Friday between 4:05 p.m. and 8 p.m. ET. The trade, however, is active only during the Ext. PM session for that day. The Ext. PM session runs daily from 4:05 p.m. to 8 p.m. ET, Monday through Friday, excluding market holidays.
While placing orders in extended hours is sometimes viable, traders will want to consider some of the downsides as well. First, only limit orders are accepted in extended orders; market and stop orders are not. Second, trading activity often falls sharply at the end of normal trading hours and the lack of liquidity in extended hours can pose additional risks, especially during the GTC+ extended-hours time frame. For example, an earnings report or other news event might trigger a sharp drop in the stock and fill a buy limit order, only to see the stock continue to move lower against the trader.
At Schwab, you have several choices for how long your limit order stays active.
- Day only.Order is active for one regular trading session only (or the remainder of the trading session if the order is entered while the market is already open).
- Good till canceled (GTC).Order is active between the hours of 9:30 a.m. and 4 p.m. ET and active for up to 180 calendar days (unless filled or canceled). Orders placed after 4 p.m. ET during the weekend or on holidays will be active the next trading day.
- Day + extended hours. Order is active during all equity trading sessions from 7 a.m. to 8 p.m. ET for one day only. Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- GTC + extended hours.Order is active for all equity trading sessions from 7 a.m. to 8 p.m. ET and is active for up to 180 calendar days (unless filled or canceled). Orders placed after 8 p.m. ET during the weekend or on holidays will be active the next trading day.
- Extended-hours a.m. (Ext. AM).Order can be placed between 8:05 p.m. ET (previous trading day) and 9:25 a.m. ET. The trade, however, is active only during the Ext. AM session for that day. The Ext. AM session runs daily from 7 a.m. to 9:25 a.m. ET, Monday through Friday, excluding market holidays.
- Extended-hours p.m. (Ext. PM).Order can be placed Monday through Friday between 4:05 p.m. and 8 p.m. ET. The trade, however, is active only during the Ext. PM session for that day. The Ext. PM session runs daily from 4:05 p.m. to 8 p.m. ET, Monday through Friday, excluding market holidays.
While placing orders in extended hours is sometimes viable, traders will want to consider some of the downsides as well. First, only limit orders are accepted in extended orders; market and stop orders are not. Second, trading activity often falls sharply at the end of normal trading hours and the lack of liquidity in extended hours can pose additional risks, especially during the GTC+ extended-hours time frame. For example, an earnings report or other news event might trigger a sharp drop in the stock and fill a buy limit order, only to see the stock continue to move lower against the trader.
What is a stop order, and how is it used?
A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price"). If the stock reaches the stop price, the order becomes a live market order and is typically filled at the next available market price. If the stock fails to reach the stop price, the order isn't executed.
A stop order may be appropriate in various scenarios:
- When a stock you already own has risen and you want to attempt to protect part of your unrealized gain should it begin to fall.
- When you recently bought a stock and want to set a floor around the level of loss you'd be willing to tolerate on the position.
- When you want to buy a stock should it break above a certain level because you think that could signal the start of a continued rise.
A sell stop order is sometimes referred to as a "stop-loss" order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price. If the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market's current price. A sell stop order is not guaranteed to execute near your stop price. A stop order may also be used to buy. A buy stop order is entered at a stop price above the current market price (in essence, "stopping" the stock from getting away from you as it rises).
Let's revisit our previous example but look at the potential impacts of using a stop order to buy and a stop order to sell—with the stop prices the same as the limit prices previously used.
While the two graphs may look similar, note that the position of the red and green lines is reversed: The stop order to sell would trigger when the stock price hit $144 (or less) and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it's possible that the order could be executed at a price that's lower than the stop price. Conversely, for the stop order to buy, if the stock price of $164 is reached, the buy stop order could be executed at a higher price.
Source: thinkorswim platform
What are price gaps?
A price gap occurs when a stock's price makes a sharp move up or down with no trading occurring in between. It can happen because of factors like earnings announcements, a change in an analyst's outlook, or a news release. Gaps frequently occur when exchanges open or when news or events outside of trading hours have created an imbalance in supply and demand.
Stop orders and price gaps
Remember that the key difference between a limit order and a stop order is that the limit order will only be filled at the specified limit price or better; whereas, once a stop order triggers at the specified price, it will be filled at the prevailing price in the market—which means it could be executed at a price significantly different than the stop price.
What is a stop limit order?
Another order type combines a stop order and a limit order. The stop limit order specifies the price that the order should be triggered and the price that the trader wants to execute the trade. It gives the trader a traditional stop order, but once triggered, a limit order at their specified price instead of a market order. While the trader might prefer to sell at their limit price, execution isn't guaranteed, and the trader has risk of the stock moving lower after triggering.
Another order type combines a stop order and a limit order. The stop limit order specifies the price that the order should be triggered and the price that the trader wants to execute the trade. It gives the trader a traditional stop order, but once triggered, a limit order at their specified price instead of a market order. While the trader might prefer to sell at their limit price, execution isn't guaranteed, and the trader has risk of the stock moving lower after triggering.
Another order type combines a stop order and a limit order. The stop limit order specifies the price that the order should be triggered and the price that the trader wants to execute the trade. It gives the trader a traditional stop order, but once triggered, a limit order at their specified price instead of a market order. While the trader might prefer to sell at their limit price, execution isn't guaranteed, and the trader has risk of the stock moving lower after triggering.
The chart below shows a stock that "gapped down" from more than $34 to around $32 between a previous closing price and the next opening price. A stop order to sell at a stop price of $34—which would trigger at the market's open because the stock's price fell below the stop price and, as a market order, executes at $32—could be significantly lower than intended, and worse for the seller. In the case of a stop limit order with the stop set at $34 and the limit at $33, for example, the trader could be watching the stock trade lower and "hoping" or "waiting" for the stock to return to $33 before being executed.
Stop order: Gaps down can result in an unexpected lower price.
Source: thinkorswim platform
Limit orders and price gaps
In a similar way that a "gap down" can work against you with a stop order to sell, a "gap up" can work in your favor in the case of a limit order to sell. In the next example, a limit order to sell is placed at a limit price of $105. The stock's prior closing price was $104. If the stock opened at $110 due to positive news released after the prior market's close, the trade would be executed at the market's open at that price—higher than anticipated and better for the seller.
Limit order: Gap up can result in an unexpected higher price.
Source: thinkorswim platform
Bottom line
Many factors can affect trade executions. In addition to using different order types, traders can specify other conditions that affect an order's time in effect, volume, or price constraints. Before placing your trade, become familiar with the various ways you can control your order. That way, you'll be much more likely to receive the outcome you're seeking.
Upbeat music plays throughout.
Narrator: You've chosen a stock or ETF you want to invest in, and you know how many shares you want to buy. Now, you've just got to place the order.
For novice investors, that may be trickier than it seems because before placing that order, they have to choose an order type.
Simply put, order types are instructions to your broker about how to execute your trade.
You don't need to know the complicated jargon or hand signals traders used to use on the floor of the New York Stock Exchange, but you should understand the basic order types and how they affect your trade.
Let's focus on the basics of how an order is placed, then three common order types: market orders, limit orders, and stop orders.
First up: how an order is placed. When you select buy or sell, your order is sent to your broker, who attempts to fill it on the market.
Prices can change constantly, and the system for routing orders has lots of moving parts, all of which impact how quickly and at what price your order is actually filled.
Using the right order type can impact these factors and make a big difference in whether your trade works the way you intended. So, it's important to understand the main order types.
Let's start with market order. This order type indicates that you want your order filled immediately at the next available price.
If prices are changing rapidly, the next available price could be different than the price quoted when you initially placed the order. Investors who use market orders tend to be more concerned about the speed of a trade than the price.
The lack of restriction on price means this order type has the best chance of being filled, but it also has the risk of being filled at a different price.
For example, if the price is plummeting and other investors are also trying to sell, the price could drop further by the time the market order is filled. This could lead to a share sale at a price lower than what the investor intended. Likewise, if an investor places a market order after hours, the price could be very different when the order is filled at market open. Because of this, investors typically use market orders during trading hours and in highly liquid markets. This increases the chances of getting an order filled closer to the requested price.
If your priority is to buy or sell at an exact price or better, you may want to use a limit order instead. With a limit order, you specify a price, and the order won't be filled until the stock can be bought or sold at that price or better.
However, because of the price restriction, there's no guarantee the order will be filled quickly—or at all.
Investors generally use limit orders when they have a target entry or exit price and are willing to wait for the market to move in their favor.
Let's say, for example, that a stock is currently trading at $55, but an investor believes it'd be a good value at $50 or less. This investor could place a limit order to buy the stock at $50.
If the stock never reaches the limit price, the order would never be filled. If the stock does drop to $50 or below, with enough volume available at that price, the order will fill, and the investor will buy the stock for $50 or less.
The last order type is a stop order, which is actually just a market or limit order with an activation price that triggers the order.
When the stock reaches the activation price, the order is executed according to its order type.
Stop orders can be used in various ways. Investors can use buy-stop orders to buy securities when they reach the activation price. Or they can use sell-stop orders when trying to limit potential loss in an investment.
For example, an investor might set a sell-stop order on a stock she owns, specifying that if the stock falls to a certain price or lower, it'll trigger an order to sell the stock at the next available market price. This could possibly prevent more serious losses by getting out before the stock falls too far.
There are three types of stop orders: stop market, stop limit, and trailing stop. If the investor in this example uses a stop-market order, when the trigger price or lower is reached, an order will be placed to sell the stock at the next available price. The benefit is that a stop-market order may help get the investor out of the falling position quickly. The risk is that the next available price could be lower than what the investor anticipated.
If the investor uses a stop-limit order, when the stock falls to the stop price, it'll trigger an order that seeks to fill at the limit price or better. A potential benefit is being able to control what price the stock is sold at. But there's also a risk of the stock falling so quickly that the stop is triggered, but the limit order is never filled because the stock has fallen below the limit price.
Investors can also use a trailing stop order.
With a trailing stop order, instead of setting a specific activation price, you set a "trailing amount", or a certain dollar amount or percentage away from the market price. On a long position, you'd typically set a trailing stop below the market price in an attempt to lock in profits as the stock rises.
So, let's say you own a stock trading at $100 and place a trailing stop order $5 below the current price. If the stock price increases to $110, the stop price would rise from $95 to $105, staying $5 below the market price. But if the stock were to start slipping, the trailing price would stay at $105, minimizing your potential loss on the position.
Each order type has its advantages and disadvantages. Investors should plan ahead and decide which type of order is right for each scenario.
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