Stock and ETF order types: Understanding market, limit, and stop orders
Stock and ETF order types: Understanding market, limit, and stop orders
Points to know
- There are multiple ways you can place orders to trade on stocks and ETFs (exchange-traded funds). The basic order types are: limit, market, stop, and stop-limit.
- Invest carefully during volatile markets. Traders may not be able to quickly match buyers and sellers to execute your order.
- Limit, stop, and stop-limit orders can process with either your broker's default cost basis method or your preferred cost basis method, if applicable.
Buy orders vs. sell orders
In the stock market, buy orders and sell orders are the building blocks of transactions. A buy order is a request to purchase a security, while a sell order is a request to sell a security.
When trading, you're typically buying or selling at the current market price—and those prices can fluctuate rapidly. To manage volatility risk, traders can use specific order types that give more control over the price you're willing to pay or sell for. For example, a limit order lets you set a maximum price to buy a security or a minimum price to sell a security. This way, you can help protect yourself from market swings and avoid trading at a price you don't want. The limit order is one among several order types that can help you refine your trading strategy.
Types of stock and ETF orders
When investing in the stock market, 2 popular choices are stocks and ETFs (exchange-traded funds). Stocks represent part ownership in a single company, like Apple or Amazon. When you buy a stock, you're essentially buying a tiny piece of that company's assets and profits. On the other hand, ETFs are like baskets that hold a collection of stocks, bonds, or other securities. When you buy an ETF, you're spreading your investment across many different assets, which can help you diversify your portfolio and manage risk.
To trade a stock or ETF, you submit an order to buy or sell a specific number of shares near a set price. There are several order types, each with distinct rules and advantages.
Choosing the right order type is crucial for your trading strategy. If you choose the wrong order type, you might end up paying more than you want, selling for less than you want, or even missing out on a trade altogether. Here are the 4 most common order types, along with their benefits and risks:
Order Type
|
Description |
Benefits |
Risks |
|---|---|---|---|
Limit order |
Buy/sell at a specific price (or better). |
Price control. |
May not be executed. |
Market order |
Buy/sell at the current market price. |
Fast execution. |
No price control. |
Stop-loss order |
Buy or sell once a specific price is reached. (Once a stop-loss order is triggered it becomes a a market order to sell.) |
Loss protection. |
May sell for a price less than or buy for a price higher than the desired stop price. |
Stop-limit order |
Combination of a stop-loss order. (Once a stop limit order is triggered the order becomes a limit order to buy or sell.) |
Price control and loss protection. |
More complex. May not be executed, and can buy above stop price or sell below stop price if the market jumps quickly. |
Description:
- Buy/sell at a specific price (or better).
Benefits:
- Price control.
Risks:
- May not be executed.
Description:
- Buy/sell at the current market price.
Benefits:
- Fast execution.
Risks:
- No price control.
Description:
- Buy or sell once a specific price is reached. (Once a stop-loss order is triggered it becomes a a market order to sell.)
Benefits:
- Loss protection.
Risks:
- May sell for a price less than or buy for a price higher than the desired stop price.
Description:
- Combination of a stop-loss order. (Once a stop limit order is triggered the order becomes a limit order to buy or sell.)
Benefits:
- Price control and loss protection.
Risks:
- More complex. May not be executed, and can buy above stop price or sell below stop price if the market jumps quickly.
Additional Vanguard capabilities for large positions or illiquid securities:
For oversized stock or ETF orders, clients at Vanguard may request that an order be designated as "not held." This gives Vanguard's Block Desk the discretion to determine the optimal timing and method of execution, using advanced tools such as algorithmic strategies and access to non-displayed liquidity to minimize market impact and seek best execution.
When immediate execution is preferred, Vanguard may facilitate a negotiated trade exclusively for ETF transactions. This involves initiating a request for quote process, where multiple liquidity providers are invited to competitively quote prices. The best-priced quote is selected for execution, offering price certainty and immediate liquidity. This approach ensures flexibility and efficiency in the handling of larger ETF orders.
Eligibility and acceptance of "not held" orders requiring special handling is at the sole discretion of Vanguard Brokerage. These orders can only be facilitated over the phone. For more details, please contact a Vanguard Brokerage Block desk associate.
Limit orders: Setting parameters
A limit order is an order to buy or sell a stock at a specific price (or better) that you set. It's like setting a budget for a stock purchase or sale. With a limit order, you're essentially saying, "I'm willing to pay up to $X for this stock" (buy limit) or "I'm willing to sell this stock for at least $Y" (sell limit).
Buy limit orders:
- You set a maximum price you're willing to pay for a stock (e.g., $50).
- If the stock's market price falls to $50 or below, your order is executed at $50 or less.
- If the stock's market price stays above $50, your order won't be executed.
Sell limit orders:
- You set a minimum price you're willing to sell a stock for (e.g., $60).
- If the stock's market price rises to $60 or above, your order is executed at $60 or more.
- If the stock's market price stays below $60, your order won't be executed.
Limit orders ensure you get the price you want, but they don't guarantee execution. If there's no buyer or seller willing to meet your price, your order might not be filled.
- Price protection. You set the minimum sale price or maximum purchase price.
- Control over order duration. You choose how long your order remains in effect—one business day or up to 60 calendar days (good-till-canceled).
- Partial or no fill. Your order may not execute if the market price doesn't move below your buy limit or above your sell limit.
- Limited availability. Even if the market price reaches your limit, your order can't be filled if there aren't enough shares available or if the stock price moves away before the order is executed.
- Limit orders work best when you're not in a hurry to trade, or when you want to buy or sell at a specific price.
- If you want to increase the chance of your order being filled, you can set your buy limit at or above the current market price, and your sell limit at or below the current market price.
- To control the duration of your order, you can set a "good-till-canceled" (GTC or GTX) or "day order" (DAY) designation.
- It's smart to monitor your order status and be prepared to adjust or cancel if market conditions change.
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 orders: A basic request
When you think of buying and selling stocks or ETFs, a market order is probably the first thing that comes to mind. You place the order, a broker sends it to the market to execute as quickly as possible, and the order is completed.
A market order is an order to buy or sell a security at the best available price in the market at the time the order is received. This type of order prioritizes execution over price, meaning your order will be filled as long as there are willing buyers or sellers in the market.
- Buy market order. The order is executed at the lowest available ask price, which is the price at which a seller is willing to sell the security.
- Sell market order. The order is executed at the highest available bid price, which is the price at which a buyer is willing to buy the security.
- Quick execution. Your order is likely to be executed immediately if the security is actively traded and market conditions permit.
- Ideal for high-liquidity stocks. Market orders work well for popular, actively traded stocks with many buyers and sellers.
- Simple to place. Market orders are one of the easiest types of orders to enter, with no need to set a specific price.
- No risk of order expiration. Unlike limit orders, market orders don't expire if they're not filled at a specific price.
- No price control. You have no control over the price at which your order is filled, which can result in a less favorable execution price.
- Price fluctuations. Market orders can be particularly risky in volatile markets, where market prices can fluctuate rapidly. As a result, your order may be filled at a different price than expected.
- Slippage risk. In fast-moving markets, there's a risk that the execution price may differ from the quoted price you see when you place your order.
- No protection from market gaps. Market orders can be filled at unfavorable prices if there's a sudden gap in the market or there is insufficient liquidity, meaning there aren’t enough buyers or sellers of a particular security.
Market orders can be a good choice for some trades, but not all. Be mindful of trading hours and liquidity of the security before placing a market order. If you place a market order when the market is closed, you may see a large jump or drop in price from one day to another.
Here are some key points to know when placing market orders:
Consider using market orders with:
- Highly liquid stocks with high daily volumes.
- Urgent trades where speed is a priority.
- Calm markets.
Be cautious with:
- Thinly traded stocks with low daily volumes (may execute at unfavorable prices).
- Illiquid markets with few buyers or sellers.
- Premarket or after-hours trading (prices may change significantly once the markets open).
- Volatile markets with wide price swings.
Let's say you want to buy 100 shares of XYZ stock, which is trading at $15 a share. You're willing to pay the current market price, whatever it is.
How it works:
- You go online or call a broker to place a market order to buy 100 shares of XYZ stock.
- Your broker sends the order to the exchange, where it's matched with the seller with the lowest asking price at the time the trade is placed.
- Let's say the current market price is $15.25 when your order is filled. You'll buy 100 shares of XYZ stock at $15.25 per share, for a total cost of $1,525.
Stop-loss orders: Setting trigger prices
A stop-loss order is an order that becomes a market order when the security reaches a specific price, known as the stop price. It's also commonly called a "stop order."
Sell stop-loss orders:
- You place a sell stop-loss order below the current market price.
- A market sell order is triggered when the stock drops to the stop price.
- This is used to limit losses on a long position, so if the price of your stock plummets, you feel less of the impact.
Buy stop-loss orders:
- You place a buy stop-loss order above the current market price.
- A market buy order is triggered when the stock rises to the stop price.
- This is used to limit losses on a short position or to enter a trade when momentum is increasing.
- Risk management. Manage risk and limit potential losses on a long position.
- Profit locking. Capture gains by locking in profits on a long position.
- Order duration. Specify order duration (day only or good-till-canceled).
- Price control. Set a specific price to buy or sell a security, even when you're not actively monitoring the market.
- No price guarantee. Your execution price may not match your stop price, as a stop-loss order triggers a market order.
- Volatile market risk. In rapidly changing markets or if the stock/ETF gaps in price, your execution price could be significantly different than your stop price.
- Price rebound risk. Temporary market movements may cause your stop-loss order to execute at an undesirable price, even if the stock price stabilizes later.
The terms "stop-loss order" and "stop order" are sometimes used interchangeably, but it's important to understand that a stop-loss order doesn't guarantee protection from losses as a result of poor execution. That's because once the stop price is reached, the order becomes a market order, potentially leading the execution price to differ from the stop price, especially in volatile markets.
Placing a "stop-limit order" may help manage some of the risks associated with stop-loss orders.
- For a buy stop-limit order, set the stop price above the current market price, with a limit for the maximum price at which you're willing to buy.
- For a sell stop-limit order, set the stop price below the current market price, with a limit for the minimum price at which you're willing to sell.
Here are some additional points to know:
Consider using stop-loss orders to:
- Limit losses. Stop-loss orders can help limit potential losses when you're not actively monitoring your positions.
- Lock in profits. Stop-loss orders can help you lock in profits when a security's price moves in your favor. For example, if you buy a stock or ETF for $35 dollars a share and believe its value will increase, you could set a stop-loss order at $45 to lock in a gain of $10. Your order will execute at $45 unless there is a significant and rapid change in the price of the security that causes it to gap down and trade below $35.
Use caution when dealing with:
- Volatile markets. You may want to avoid using stop-loss orders in highly volatile markets, as these orders can be triggered by temporary price movements.
- Illiquid securities. Be cautious when using stop-loss orders for illiquid securities, as these orders may not be executed at a fair price.
Buy stop-loss order
You want to purchase a stock that is currently trading at $20.50 a share. Since you think the price will continue to rise, you decide you're willing to buy if it increases to $22.20 a share, and you place a buy stop-loss 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-loss 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-loss 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 about 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've already sold your shares.
Stop-limit orders: Getting a price
A stop-limit order is a type of stop-loss order that combines the features of a stop-loss order and a limit order. When the stock price reaches or passes through the stop price, the stop-limit order is triggered, but instead of turning into a market order, it becomes a limit order to buy or sell at the specified limit price. Your stop price triggers the order; the limit price sets your sales floor or purchase ceiling.
For example, if you own a stock trading at $50 and set a stop price at $45 and a limit price at $44, the stop-limit order will only sell your shares if the price falls to $45 or lower, but only if you can get at least $44 per share.
- Price control after the stop limit is met. You can specify the minimum or maximum price you're willing to accept for your shares.
- Flexibility in order duration. You can specify the duration of the order, choosing from day only or good-till-canceled (60 calendar days).
- Reduced risk of slippage. By setting a limit price, you can help minimize the risk of buying or selling at a price that's significantly worse than the stop price.
- Ability to set a "take profit" price. You can use a stop-limit order to lock in profits if the stock price reaches a certain level.
- No guarantee of execution. There's a risk that your stop-limit order may not be executed at all, even if the stock price reaches your stop price.
- Risk of missing a trade. The stock may trade quickly through your limit price, and the order may not be executed.
- Competition from other orders. If there are other orders at your limit price and there aren't enough shares available to fill your order, the stock price could pass through your limit price before your order is executed.
When to use
- Buy stop-limit orders. Set the stop price at or above the current market price and set your limit price above that. Use it when you think a falling stock is likely to rebound.
- Sell stop-limit orders. Set the stop price at or below the current market price and set your limit price below that. Use it when you want to lock in profits on a stock if it’s price begins to fall.
Important factors
- Make sure there's enough buying or selling interest to support the stock price once it reaches your stop price.
- Be prepared for rapid changes in price that could leave your order unfilled.
- Avoid using stop-limit orders in volatile or illiquid markets, or in fast-moving or news-driven markets.
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-loss order is triggered when the stock drops to $15.20 or lower, and the order will only execute at or above your $14.10 limit price.
Order timing and extended hours trading
When making your stock order, it's important to use timing options wisely. Day orders remain active only for the trading day on which they're placed and expire if not executed. Good-till-canceled orders remain active for up to 60 calendar days, unless they're executed or canceled.
Extended hours trading (premarket and after-hours) can be risky due to lower liquidity and increased volatility. Prices can fluctuate more dramatically, and news events may not be fully reflected in the market until the trading day begins. You can use limit orders to get more control over execution prices and mitigate these risks.
Price gaps and their impact on orders
Price gaps occur when the opening price of a security is significantly higher or lower than its previous closing price. These gaps can be caused by various factors, such as earnings reports, major news events, or significant market movements.
Gaps can have a significant impact on stop and stop-limit orders. For instance, a stop-loss order set below the current price might be triggered by a gap down, causing the order to be executed at a much lower price than anticipated. For example, if a stock closes at $100 and gaps down to $90 the next day due to a negative earnings report, a stop-loss order set at $95 would be executed at $90, resulting in a larger loss than expected.
Choosing the right order type for your strategy
When investing, there are many factors outside of our control, but careful order type selection is one way to influence the impact of your trade. Market orders are best for immediate execution at the current price, while limit orders allow you to set a specific price for buying or selling. Stop-loss orders are useful for setting a price to exit a position if the market moves against you, and stop-limit orders combine the benefits of stop and limit orders by setting both a trigger price and a limit price.
For beginners, it's often best to start with market and limit orders to get a feel for the market. Advanced traders might find stop and stop-limit orders more useful for managing risk and executing complex strategies. Key factors to consider when choosing an order type include your trading objectives, risk tolerance, and the specific market conditions you're facing.
However you use stock orders, investing is a great tool for meeting your financial goals and building the life you want.
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