Stock Order Types: Getting to Know the Basics

Key Points

  • Stock order types can have a significant impact on the time, price and manner of your transactions.
  • Orders are affected by three main factors: time in force, qualifiers and types.
  • Learn more about order types by reviewing some examples. 

During volatile market environments, prices tend to move faster and bid/ask spreads tend to widen—so it’s critical to understand and use the appropriate order types to help control your trade’s price, timing, and manner of execution.

While many market factors are beyond your control, if you have a clear understanding of how the order you place will be received in the marketplace, you will be much more likely to get the results you desire. Here are some stock order basics:

Order types

These are guidelines that modify the execution conditions of an order based on volume, time and price constraints.

A market order is an order to buy or sell a stock at the best possible price available at the time the order is received in the marketplace. A market order for a New York Stock Exchange or NASDAQ listed stock will generally be filled at or close to the National Best Bid and Offer (NBBO). The NBBO is a term that refers to the U.S. Securities and Exchange Commission (SEC) requirement that brokers attempt to provide customers the best available bid price when their customers sell securities and the best available ask price when they buy securities. It is important to remember that factors such as the size of your order, significant news reports and rapidly changing market prices can result in execution at a price different from the NBBO. Additionally, if the size of your order exceeds the number of shares available at the time your order is entered, your order may be split and executed at several different prices until filled.

Market orders are normally placed with a "day-only" time in force, which means they will trade only on the business day and in the trading session in which they're placed. Market orders placed after 4:00 p.m. ET will be entered for the next trading day at 9:30 a.m. ET. Because market orders are typically filled very quickly, once they are entered, they generally cannot be canceled. It is important to remember—particularly with large orders or in fast market conditions—that you are never guaranteed the NBBO you're quoted at the time your order is entered.

Limit orders are best when your primary objective is to obtain a specific price rather than a quick execution. You can use limit orders to ensure that:

  • A buy order is not executed above the maximum price you are willing to pay.
  • A sell order is not executed at a price that is below the minimum price you are willing to accept.

Although a limit order allows you to specify a price, there is no guarantee of an execution, even if the market moves and reaches your limit price. Because limit orders are typically executed on a first-come, first-served basis, orders received before yours may execute and remove all available shares at your price.

Limit order executions occur in a similar fashion as a market order, except that all executions will occur at the limit price (or better) you specify, at which point the remainder of your order (if any) is entered into the limit order book and becomes part of the displayed quote. Although your entire order will typically be executed with market orders, that's not always the case with limit orders. Also, keep in mind that even though executions may occur at your price level or better, your order still may not be executed. Generally this occurs due to industry trading exceptions, price corrections, or executions that may have occurred at different market venues.

Stop orders come in three main varieties: standard stop order, stop-limit order and trailing stop order. Stop and stop-limit orders are entered and held in the marketplace, while trailing stop orders are held on your broker/dealer's server until execution is possible. The table below shows a comparison of the three stop-order categories.

Stop order

Stop-limit order

Trailing stop order

Offers execution protection only, not price

Offers price protection only, not execution

Offers execution protection only, not price

No costs if not executed

No costs if not executed

No costs if not executed

Tends to work well in slowly declining markets

Tends to work well in slowly declining markets

Tends to work well in slowly declining markets

Generally does not work well in halted or gapping markets

Generally does not work well in halted or gapping markets

Generally does not work well in halted or gapping markets

Must be manually cancelled and re-entered

Must be manually cancelled and re-entered

Automatically adjusts when underlying security increases in price

Held on the book at the execution venue

Held on the book at the execution venue

Held on your broker/dealer's servers

Source: Schwab Center for Financial Research.

Stop orders are typically used to protect an unrealized gain on a position in your account. Alternatively, if a stock moves down and a specified price is reached, stop orders also help minimize losses by selling the position at the market. For example, if the current price of a stock is $190 and you want to protect against a significant decline, you could enter a sell-stop order at $185. If the bid falls to $185 or an execution occurs at $185 or lower (at the same venue where your order resides), your stop order is triggered and a market order is entered to sell at the next available market price.

Although stop orders are much more common when selling securities, stop orders can also be used to purchase stocks. Buy-stop orders are typically used to purchase stocks above a particular threshold where the investor believes an upward trend may be established.

Stop-limit orders are typically used to buy or sell a security at a specified limit price once the security has traded at or through a specified stop price. Therefore, it has two components: the stop price and the limit price, which may or may not be the same. In most cases, the stop price on a sell stop-limit order will be equal to or above the limit price. As the stock declines in value, if the stock trades at or below the stop price, the order will trigger and it will become a limit order rather than a market order. Because the order is now a limit order, execution cannot occur unless the stock can be sold at the limit price specified (or better).

To increase your chances of execution on a stop-limit order, consider placing your limit price below your stop price. The farther below the stop price you place your limit price, the better chance you have of receiving an execution in a rapidly declining market.

A trailing stop order is an order in which the stop price will "trail" either the current ask or current bid by the number of points or percentage you specify. As mentioned above, this order is held on a broker/dealer's server until the trigger is reached and then sent to the marketplace. The primary benefit of a trailing stop order is that it doesn't have to be cancelled and re-entered as the price of the stock increases.

Time-in-force orders

These specify how long an order will remain active before being executed or expired.

Day-only orders are good for the current trading session only. This does not include any extended-hours sessions that occur before 9:30 a.m. or after 4:00 p.m. Eastern Time (ET). Extended-hours orders must be specified as such.

Good-until-cancelled (GTC) orders are good for 60 calendar days at Schwab. Like day-only orders, GTC orders apply only to the regular 9:30 a.m. to 4:00 p.m. ET trading session.

Fill-or-kill (FOK) orders require that the order be immediately filled in its entirety. If this is not possible, the order is cancelled. This is one way to find hidden liquidity.

Immediate-or-cancel (IOC) orders require that any part of an order that can be filled immediately is filled, and any remaining shares are cancelled. This is another way to find hidden liquidity.

Order qualifiers

These guidelines modify the execution conditions of an order based on volume, time and price constraints. They include:

Minimum-quantity orders specify that you require a minimum number of shares to be executed in order to complete a transaction. If the minimum is not available, minimum quantity orders specify that none of the order should be executed. For example, if you enter an order to buy 5,000 shares with a minimum quantity of 1,000 shares, you are requesting that none of the order be executed unless at least 1,000 shares can be bought.

While this order qualifier may help prevent a fill of 100 shares on a 5,000-share order, it may also prevent your order from being executed at all, as this type of qualifier is prohibited on orders sent to the limit order book. It would also require that at least 1,000 shares be executed at a single venue, which may not be possible, although 1,000 shares might be available if the order was broken up and sent to multiple venues. You should be careful with minimum-quantity qualifiers, as the disadvantages may outweigh the advantages.

Do-not-reduce (DNR) orders specify that a broker not adjust the limit price of the order when the stock is adjusted on the ex-dividend date.  For example, if you enter a GTC limit order to buy XYZ at $193 and, a week later, the stock reaches ex-dividend date for an upcoming dividend payment of $0.50, your limit order would normally be reduced to $192.50.

All-or-none (AON) orders specify that the order you place must be executed in its entirety or not at all. Example: If you enter an AON order to buy 5,000 shares, you are requesting that none of the order be executed unless it is for the entire 5,000 shares. While AON order qualifiers may help prevent a partial fill, they may also prevent your order from being executed at all, because they cannot be held on the exchange limit order book. AON orders also require that the entire order be executed at a single venue, which may not be possible, although execution might be possible if the order were broken up and sent to multiple venues. As with minimum-quantity orders, be careful with all-or-nothing qualifiers—the drawbacks may outweigh the benefits.

Bottom line

Although this article is by no means exhaustive, it's meant to help you understand the basics of order types and to provide ideas to help you trade with confidence.

Next Steps

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