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. 

Whether you are buying or selling a stock, the type of order you place can have a significant impact on the time, price or 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.

Order characteristics can be divided into three categories: time in force, order qualifiers and order types.

Time in force (TIF): a special directive that indicates how long an order will remain active before being executed or expired.

 Order qualifiers: guidelines that modify the execution conditions of an order based on volume, time and price constraints.

 Order types: the types of orders used for the execution of various trades.

Time in Force    

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. 

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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. 

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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. 

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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. 

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Order Qualifiers       

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. 

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 it's at least 1,000 shares.

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 that are 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 into smaller (child) orders and sent to multiple venues. You should be careful with minimum quantity qualifiers, as the disadvantages may outweigh the advantages.

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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. 

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.

Do not reduce example

Do not reduce example

Source: Schwab.com

However, if you check the "Do not reduce" box when entering your order (as shown on the Schwab.com trading page above), your limit price will remain $193.

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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 was broken up into child orders and sent to multiple venues. As with minimum quantity orders, be careful with all or nothing qualifiers—the drawbacks may outweigh the benefits.

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Order types   

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 (NYSE) or NASDAQ equity will generally be filled at or close to the National Best Bid and Offer (NBBO). 

The NBBO is a term that refers to the US 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. The NBBO is dynamically updated throughout the trading day to show a security's highest bid and lowest offer (ask) among all exchanges, execution venues and market makers registered to trade that security.

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 different price than 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 into child orders and executed at several different prices. For NASDAQ securities, Schwab utilizes intelligent order routing technology.

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 4:30 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.

Example: Assume you enter an order to buy 5,000 shares of MFFF at the market price of $41.38.

Market order example

Market order example

Source: Schwab.com.

As shown above, if market conditions haven't changed and there are sufficient shares available in the market when your order is received, you would buy 5,000 shares at the ask price of $41.38. If your order is not filled at $41.38, the ask price would probably increase to $41.39 and whatever portion of your order that could not be executed at the original ask price would be filled at the new ask price (assuming there are sufficient shares available at that price). If there are insufficient shares to execute the balance of your order at $41.39, the remaining shares would execute at $41.40, and so on. At each subsequent price, your order will be filled if possible. Because this is a market order, the total (average) execution price would be greater than the ask price that was quoted when the order was placed.

If this order was for a NASDAQ stock, Schwab's order router would automatically seek to obtain a high-quality execution for your order. This could be accomplished by splitting your order into several parts and sending it to multiple venues. As with the example above, the average execution price would be greater than the ask price that was quoted when the order was placed.

Keep in mind that because quotes can change multiple times per second, market prices could move substantially higher or lower between the time a market order is entered and the time it is executed. This is especially true during times of high market volatility or unusually heavy volume. Orders entered outside of standard market hours are even more likely to experience wide price fluctuations.

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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. When this occurs, your order may be represented as the best bid (buy orders) or best ask (sell orders) and displayed in the trading window.

Example: If your buy order makes it to the front of the line at your limit price, it will be executed when another sell order at your price (or at market price) is received. Similarly, if your sell order makes it to the front of the line, it will be executed when another order to buy at your price (or at market price) is received. Additionally, a market maker or other participant may decide to trade with you and execute all or part of your order at your limit price. Should this happen, the market price may or may not change.

Because some venues also offer hidden order types and large orders of 10,000 shares or more are sometimes handled by human market makers, these orders may not be displayed until all parts of the order are executed.

Limit order executions occur in a similar fashion as the market order example above, 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, make sure to 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.

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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 a Schwab 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 Schwab servers

Source: Schwab Center for Financial Research.

Stop orders and stop-limit orders are very similar, the primary difference being what happens once the stop price is triggered. A standard sell-stop order is triggered when a transaction occurs that is equal to or less than the stop price specified.

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.

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. Because the stop order is now a market order, all characteristics of market orders apply.

In most cases, your stock will be sold at a price that is close to the market price at the time is it is triggered. However, you must remember that a stop order becomes a market order, so in cases where the stock is halted and reopens for trading or when the stock gaps open in the morning (lower than the prior day’s closing price), your execution price could be significantly lower than your stop price.

Although stop orders are much more common when selling securities, stop orders can also be used to purchase stocks. A standard buy-stop order is triggered when a transaction occurs that is equal to or higher than the stop price specified (at the same venue where your order resides). Buy-stop orders are typically used to purchase stocks above a particular threshold where the investor believes an upward trend may be established.

Example: The current price of XYZ is $95, and you believe that once the price rises to $100, it will continue to rise. Therefore, you want to buy at or as close to $100 as possible. This could be a great time to place a buy stop at $100. If the ask price reaches $100 (or if an execution occurs at $100 or higher), the buy-stop order becomes a market order. Your order is then filled at the next available market price, which would usually be somewhere close to $100. However, because the stop order becomes a market order once it is triggered, if the stock is halted or opens for trading at a price that is much higher than $100, your stop order will immediately trigger and your purchase price could be much higher than $100. 

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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. 

Unlike standard sell-stop orders, with a sell stop-limit order, you must enter both a stop price and a limit price. 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). Additionally, all other characteristics of limit orders apply, as well.

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 limit order never gives any guarantee of execution because the stock may trade below the limit price before the order can be filled. This often occurs when a stock is reopened for trading after being halted for a significant news announcement, or when the stock opens for trading at a price that is much lower than the previous day's closing price. When this occurs, the stop-limit order will trigger and be entered in the marketplace as a limit order, but the limit price may never be reached.

Example: The current price of a stock is $90. You place a stop-limit order to sell 1,000 shares at a stop price and limit price of $87.50. If the bid price falls to $87.50 or if an execution occurs at $87.50 or below, your order will be triggered and become a limit order to sell at $87.50 or more. If the market is falling fast, your order may not be filled at all if the next trade occurred at $87.45 and the stock continued to decline. However, if you entered your order at $87.50 stop, $87.25 limit, and if the next trade after the $87.50 trigger was at any price above $87.25, your order would be executed. Conversely, in a slowly declining market, your order might be filled at $87.50 or better if market conditions allow for it.

While less common, buy stop-limit orders can be used to purchase stocks at a limit price once they exceed the trigger price while moving higher. All characteristics are the same except that for a buy stop-limit order, the trigger will occur when the stock trades at or above the stop price. Again, you can increase your chances of execution by entering your limit price above your stop price.

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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 Schwab server until the trigger is reached and then sent to the marketplace. 

Example: Assume you placed a 5% trailing stop order on a recently purchased stock position.

Trailing stock order

Trailing stock order

Source: StreetSmart Edge.

As the stock increases in price, if at any point the bid retraces (falls) by 5%, a market order will automatically be entered for the quantity you specified. With this order, if the bid price increases 9% and then drops 5%, the order will be sent at that time. The change from the time the trailing stop was placed would effectively be 4% above where you placed the order. Since a trailing stop order becomes a market order when triggered, it will behave very similar to a regular stop order.

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.

 

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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.

I hope this enhanced your understanding of order types. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts.

 

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