Market order, limit order, or stop order: What are they and which should you use?

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Ready to place an order? Know your limits.

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Investors can buy or sell stocks using a variety of different order types depending on their objectives. For example, the two basic order types are the market order and the limit order. How do you know which one to use?

Investing in the stock market—or any market, for that matter—is about more than buying and selling. By using certain order types, you may be able to get into (and out of) a position at a better price, all while automating your risk management in hopes of a better night’s sleep.

Understanding the different order types is especially important for active investors and traders who try to profit from short-term movements in the market.

At the most basic level, order types are specific instructions for how you want to buy or sell stocks or other securities. These orders are placed through your broker, who then transmits them to an exchange where the transaction takes place.

Stocks are bought at the ask price and sold at the bid price. The difference between the two is called the spread. The price where you actually buy or sell a stock is the execution or the fill price.

A market order is designed to execute at the current price for a stock—the so-called market price—when the order reaches the exchange. These orders are the quickest to fill, but they do not guarantee a specific price.

Suppose you place a market order to buy a stock that’s trading at $100 in a fast-moving market. In the time between when you place the order and when it executes, the price could increase, causing you to pay more. This change in price is referred to as “slippage.”

In contrast, limit orders are used to buy or sell stocks at a specific price or better, guaranteeing you’ll get a minimum execution price.

For example, if XYZ is trading at $51 per share, and you place a limit order to buy it at $50.50, the order will get filled only if the market price drops to $50.50 or less. Similarly, if you wanted to sell XYZ for $51.50 or more, you could place a limit order and set the price at $51.50.

The type of order you choose should be based on specific reasoning for the situation. Here are some examples of when you might want to use a market order and when a limit order might make more sense.

Consider using a market order when:

Consider a limit order when:

Imagine that a stock’s price is dropping as it approaches a support level—that is, a specific price point that it has historically had a hard time falling below.

If you already own the stock, and are bearish, you might be concerned that if price breaks below support, selling may increase and the price could drop fast. So when the stock starts to trade below support, you might put in a market order to get out as quickly as possible—even though you may experience a small amount of slippage.

On the other hand, if you don’t own the stock and are bullish, you might think that support level will hold and it would be a good price to buy. In that case, you could put a limit order in to try and get filled as close to that support level as possible.

A stop order is essentially a market order that’s in a suspended state. It will be activated only if and when a certain price, the stop price, is hit.

Although stop orders can be used to lock in profit, they’re also called “stop-loss” orders because they’re often employed to prevent a loss—or a bigger loss—on a trade. Some traders call it a “stop-the-bleeding” order.

A stop order can be used to exit or enter a position.

For example, suppose you bought XYZ at $40 and it went up to $41.50. If you want to ride the rally as far as it will go, but ensure you’ll capture at least a $1 profit, you could put in a (sell) stop order at $41. If XYZ trades back down to $41, your stop becomes a market order and will compete with other market orders at that time.

You’ll close your position, but it might not be executed exactly at $41. You’ll get the prevailing bid price at the time the market touches your stop price. So you might be filled at $41, or $40.99, or even a few pennies lower. Most stop orders in liquid stocks get filled within a couple cents of the stop order price, except in extreme circumstances.

What if you don’t own XYZ, but want to buy it if it rises above a resistance level at $45? In that case, you could put in a (buy) stop order at $45.05. If the price touches that level it would turn into a market order, but in this case, buying the stock instead of selling it.

Market, limit, and stop orders are basic order types that can help you buy and sell stocks and other securities at optimal prices while also managing risk. There are many other order types, but these three comprise the overwhelming majority of orders, particularly for retail investors.

The choice of order type depends on the specific strategy you’re employing and the goals you wish to achieve. As always, it’s important to consider the potential advantages and disadvantages of each order type when making investment decisions.

As any veteran trader will tell you, it’s no easy feat to nail the absolute high or low price of any given market move. If you place a limit order to try to squeeze out an extra nickel, you might miss a chance. But if you jump too soon with a market order, you might feel like you left money on the table.

The best thing to do is pick your strategy, pick your price objectives, and whatever happens, don’t take it personally. It is what it is.