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Order types & how they work

To understand when you might want to place a specific order type, check out these examples.

POINTS TO KNOW

  • There are 4 ways you can place orders on most stocks and ETFs (exchange-traded funds), depending on how much market risk you're willing to take.
  • Invest carefully during volatile markets. Traders may not be able to quickly match buyers and sellers to execute your order.
  • The use of options, an advanced strategy that entails a high degree of risk, is available to experienced investors.

Limit order: Setting parameters

A limit order ensures that you get a price for a stock or an ETF in the range you set—the maximum you're willing to pay or the minimum you're willing to accept.

Benefits

 

It offers you price protection—you set the minimum sale price or maximum purchase price.

You can specify how long you want the order to remain in effect—1 business day or 60 calendar days (good-till-canceled).

Risks

 

Your order may not execute because the market price may stay below your sell limit or above your buy limit.

If there are other orders at your limit, there may not be enough shares available to fill your order. Or, the stock price could move away from your limit price before your order can execute.

Hints

 

If you want to improve the chances that your order will execute:

  • For a buy limit order, set the limit price at or below the current market price.
  • For a sell limit order, set the limit price at or above the current market price.

Examples

 

Buy limit order

You want to purchase XYZ stock, which is trading at $15 a share. You'll buy if it drops to $13, so you place a buy limit order with a limit price of $13. The order will only execute at or below your $13 limit.

Sell limit order

You own a stock that's trading at $12 a share. You'll sell if the price rises to $13, so you place a sell limit order with a limit price of $13. The order will only execute at or above your $13 limit.

Market order: A basic request

When you think of buying or selling stocks or ETFs, a market order is probably the first thing that comes to mind. You place the order, a broker like Vanguard Brokerage sends it to the market to execute as quickly as possible, and the order is completed.

Benefits

 

Your order is likely to be executed immediately if the security is actively traded and market conditions permit.

Risks

 

The price is not guaranteed. With market orders, the priorities are speed and execution, not price.

During volatile markets, the price can vary significantly from the price you're quoted or one that you see on your screen.

Hints

 

Thinly traded stocks, those with low average daily volumes, may execute at prices much higher or lower than the current market price. Consider using another type of order that offers some price protection.

Beware of placing market orders when the market's closed. Because stock and ETF prices can vary significantly from day to day, waiting until the market opens allows you to receive a current trading price and get a view of how liquid the market for that security is.

Examples

 

Buy or sell

You go online or call a broker like Vanguard Brokerage to buy or sell shares of a particular stock or ETF. The price you pay is whatever the stock is trading at when your order is fulfilled.

Stop order: Setting trigger prices

A stop order combines multiple steps. You set your stop price—the trigger price that activates the order. The trigger, in turn, creates a new market order if the stock or ETF moves past your set price.

Benefits

 

You can specify how long you want the order to remain in effect—1 business day or 60 calendar days.

Risks

 

Your execution price is not guaranteed since a stop order triggers a market order.

In a volatile market or if the stock or ETF gaps in price, your execution price could be significantly different than your stop price.

Temporary market movements may cause your stop order to execute at an undesirable price, even though the stock price may stabilize later that day.

Hints

 

Some use the terms "stop" order and "stop-loss" order interchangeably. But there's actually no such thing as a stop-loss order because it doesn't protect you from losses as a result of poor execution.

Placing a "limit price" on a stop order may help manage some of the risks associated with the order type.

  • For a buy stop order, set the stop price above the current market price.
  • For a sell stop order, set the stop price below the current market price.

Examples

 

Buy stop order

You want to purchase a stock that is currently trading at $20.50 a share. Believing the price will continue to rise, you're willing to buy if it increases to $22.20 a share, and you place a buy stop order with a stop price of $22.20.

Once the stock hits $22.20 or higher, you buy the stock at the current market price, which may be significantly higher than your $22.20 stop price.

Sell stop order

You own a stock that's trading at $18.25 a share. You'll sell if its price falls to $15.10 or lower, so you place a sell stop order with a stop price of $15.10.

Once the stock drops to $15.10 or lower, your stock is sold at the current market price, which may vary significantly from the stop price.

Here's the risk: If the stock closed at $18 one day and opened at $12 the next day due to news on that stock, the $12 opening price would activate your stop price and trigger a market order. In this situation, your execution price would be significantly different from your stop price. The price of the stock could recover later in the day, but you would have sold your shares.

Stop-limit order: Getting a price

A stop-limit order triggers a limit order once the stock trades at or through your specified price (stop price). Your stop price triggers the order; the limit price sets your sales floor or purchase ceiling.

Benefits

 

You can specify the duration—1 business day or 60 calendar days.

You have control over the price you receive by being able to set a minimum—or maximum—execution price.

Risks

 

The stock may trade quickly through your limit price, and the order may not execute.

There may be other orders at your limit, and if there aren't enough shares available to fill your order, the stock price could pass through your limit price before your order executes.

Hints

 

For a buy stop-limit order, set the stop price at or above the current market price and set your limit price above, not equal to, your stop price.

For a sell stop-limit order, set the stop price at or below the current market price and set your limit price below, not equal to, your stop price.

Examples

 

Buy stop-limit order

You want to buy a stock that's trading at $25.25 once it starts to show an upward trend. You don't want to overpay, so you put in a stop-limit order to buy with a stop price of $27.20 and a limit of $29.50.

If the stock trades at the $27.20 stop price or higher, your order activates and turns into a limit order that won't be filled for more than your $29.50 limit price.

Sell stop-limit order

You own a stock that's trading at $18.50 a share. You'll sell if its price falls to $15.20, but you won't sell for anything less than $14.10. You place a sell stop-limit order with a stop price of $15.20 and a limit price of $14.10.

A stop order is triggered when the stock drops to $15.20 or lower; the order will only execute at or above your $14.10 limit price.


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REFERENCE CONTENT

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Stock

An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.

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ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the day using straightforward or sophisticated strategies.

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Broker/Broker-dealer

A licensed individual or firm that executes orders to buy or sell mutual funds or other securities for the public and usually gets a commission for doing so.

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Liquidity

A measure of how quickly and easily an investment can be sold at a fair price and converted to cash.

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Share

A single unit of ownership in a mutual fund or an ETF (exchange-traded fund) or, in the case of stocks, a corporation.

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Option

A type of investment that gives you the right to either buy or sell a specified security for a specific price on or before the option's expiration date.