3 Order Types: Market, Limit and Stop Orders
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—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 current best available price. A market order typically ensures an execution, but it doesn't guarantee a specified price. Market orders are optimal when the primary goal is to execute the trade immediately. A market order is generally appropriate when you think a stock is priced right, when you are 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, 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.
Generally, market orders should be 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.
Source: StreetSmart Edge®.
The above chart illustrates the use of market orders versus limit orders. In this example, the last trade price was roughly $139.
- A trader who wanted to purchase (or sell) the stock as quickly as possible would place a market order, which would in most cases be executed immediately at or near the stock's current price of $139 (white line)—provided that 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 $133 would place a buy limit order with a limit price of $133 (green line). If the stock fell to that level or lower, the limit order would be triggered and the order would be executed at $133 or below. If the stock failed to fall to $133 or below, no execution would occur.
- A trader who wanted to sell the stock when it reached $142 would place a sell limit order with a limit price of $142 (red line). If the stock rose to that level or higher, the limit order would be triggered and the order would be executed at $142 or above. If the stock failed to rise to $142 or above, no execution would occur.
Note, even if the stock reached the specified limit price, your order may not be filled, because there may be orders ahead of yours. In that case, there may not be enough (or additional) sellers willing to sell at that limit price, so your order wouldn't be filled. (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 your limit price, and a sell order could execute for more than your limit price.
A few words about timing
At Schwab, you have several options 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. 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. (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 7:00 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 8:00 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.
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 market order and is 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 these 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 riseA 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. This 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 arrows is reversed: the stop order to sell would trigger when the stock price hit $133 (or below), 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 $142 is reached, the buy stop order could be executed at a higher price.
Source: StreetSmart Edge.
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 be due to factors like earnings announcements, a change in an analyst's outlook or a news release. Gaps frequently occur at the open of major exchanges, 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 that it could be executed at a price significantly different than the stop price.
The next chart shows a stock that "gapped down" from $29 to $25.20 between its previous close and its next opening. A stop order to sell at a stop price of $29--which would trigger at the market's open because the stock's price fell below the stop price and, as a market order, execute at $25.20--could be significantly lower than intended, and worse for the seller.
Stop order: Gaps down can result in an unexpected lower price.
Source: StreetSmart Edge.
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, as illustrated in the chart below. In this example, a limit order to sell is placed at a limit price of $50. The stock's prior closing price was $47. If the stock opened at $63.00 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: StreetSmart Edge.
The 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 will be much more likely to receive the outcome you are seeking.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Schwab does not recommend the use of technical analysis as a sole means of investment research.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
There is no guarantee that execution of a stop order will be at or near the stop price.
Past performance is no guarantee of future results.
Investing involves risk, including loss of principal.0323-3TT0