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When trading stocks, exchange-traded funds (ETFs) and other securities, the three most common types of orders you can use are market orders, limit orders and stop orders (also called a stop-loss order). Each works differently and is suited to different situations.
Think of them as separate tools:
- A market order prioritizes speed.
- A limit order gives you price control.
- A stop order triggers a trade automatically when a price threshold is hit.
Read on to learn more about how the different options work and when to use them.
| Market Orders | Limit Orders | Stop Orders | |
|---|---|---|---|
| What they do | Buy or sell at the best available price right now | Buy or sell only at your specified price or better | Trigger a market order once a set price is reached |
| When they execute | Immediately during market hours | Only if the security reaches your set price | Only if the security reaches your stop price |
| Price control | None | Yes | None; once triggered, it executes at the market price |
| Best for | Speed and certainty of execution | Controlling your entry or exit price | Limiting losses or capturing breakouts |
What Is an Investment Order?
An investment order is an instruction you send to your brokerage firm to buy or sell a security. The type of order you choose tells the broker not just what to trade, but how and when to execute the transaction.
When you buy a security, there generally needs to be a seller willing to accept your price—and vice versa. For stocks and ETFs traded on major exchanges, this is rarely a problem. Orders typically execute quickly once the conditions are met. With penny stocks and other thinly traded (or low-volume) securities, however, finding a counterparty can take hours, days or even longer.
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What Is a Market Order?
A market order is the most basic type of investment order. When you place one, you instruct your broker to buy or sell a security at the best price currently available.
This guarantees your order will be filled, but not the exact price you'll receive. In liquid markets, the price you get will be very close to the quoted price. In volatile or thinly traded markets, the difference between what you expect and what you get (called slippage) can be larger.
When to Use a Market Order
Market orders are a good fit in straightforward situations. You know what you want to buy or sell, the stock market is open and getting the trade done quickly matters more than squeezing out a better price.
Market orders tend to work best under these conditions:
- Speed: You need to execute a trade quickly, and getting in or out matters more than the exact price.
- Liquid securities: You're trading a widely held stock or ETF with high daily volume, where bid-ask spreads are tight. (The bid-ask spread is the difference between what a buyer will pay and a seller will accept for an asset.)
- Small order sizes: Larger orders in thinner markets can move the price against you.
It's best to avoid market orders when the market is closed. If you place one after hours, it will execute when trading opens the next business day. That means you could end up with a very different price than you expected, particularly if news breaks overnight. For this reason, some brokers don't even allow market orders during extended-hours trading.
What Is a Limit Order?
A limit order tells your broker to buy or sell a security only at a price you specify or better. If you're buying, you set a maximum price you're willing to pay. If you're selling, you set a minimum price you're willing to accept.
For example, if a stock is trading at $120 per share but you think it's overpriced, you could place a buy limit order at $115. The broker will execute the trade only if the stock dips to $115 or below. Alternatively, if you own the stock and want to sell once it hits $125, you'd place a sell limit order at $125.
Depending on your broker, you can set a limit order to expire at the end of the trading day, at the end of extended hours or until you cancel it.
Be aware: One important caveat is that a limit order isn't guaranteed to fill. Even if the stock briefly touches your target price, your order may go unfilled. This can happen if the price moves past your limit before the broker can execute, if there aren't enough buyers or sellers at that price or if other orders ahead of yours take priority in the queue.
When to Use a Limit Order
Limit orders make the most sense when you have a specific price in mind, and you're willing to wait for the market to come to you. If you're not in a rush to execute and precision matters more than speed, a limit order gives you that control.
Limit orders tend to work best in these situations:
- Price control matters: You're not willing to pay more or accept less than a specific price.
- Volatile markets: You want to avoid the unpredictable fills that can come with market orders during fast-moving conditions.
- Extended hours: Limit orders are often the only order type accepted before and after regular trading hours.
What Is a Stop Order?
A stop order instructs your broker to buy or sell a security once it reaches a price you set, called the stop price. At that point, the stop order converts into a market order and executes at the next available price.
This differs from a limit order, which sets a hard floor or ceiling on price. A stop order sets a trigger but makes no guarantee about the price you'll receive once triggered.
For example, if you bought a stock at $120 per share and it's now trading at $145, you might set a stop-loss order at $142. If the price drops to $142, the order triggers and your shares are sold at whatever the market price is at that moment, which may or may not be $142.
You can also use a stop order to buy. If a stock is trading at $120 and you believe a move above $122 signals a continued uptrend, you could place a buy stop order at $122 to enter the trade automatically.
Price Gaps and Stop Order Risks
One risk to understand is the price gap, which occurs when a stock's opening price jumps significantly from its previous close with no trading in between, often due to overnight news or earnings reports.
If that happens, your stop order can execute far from your intended price. For example, a sell stop set at $95 might execute at $85 if the stock gaps down to that level at the open. That's a larger loss than you planned for, which is why stop orders aren't a foolproof form of downside protection.
When to Use a Stop Order
Stop orders are most useful when you want to put your risk management on autopilot. Rather than watching a position constantly, you set a threshold and let the order do the work. Consider using one in these situations:
- Protecting gains: You want to lock in profit on a position without having to monitor it constantly.
- Limiting losses: You want an automatic exit if a stock drops below a level you're comfortable with.
- Capturing breakouts: You believe a stock will rise sharply if it passes a certain price threshold.
Other Stock Order Types
The three main order types cover most investing scenarios, but you may also come across these variations:
- Day orders: Expire at the end of the current trading session if not filled.
- Good-til-canceled (GTC) orders: A type of limit order, these remain active until filled or manually canceled. Most GTC orders automatically expire after 30 to 180 days, depending on the broker.
- All-or-none (AON) orders: Must be filled in full or not at all. If not executed immediately, it'll remain active until it can be filled in full or it's canceled.
- Fill-or-kill (FOK) orders: Must be executed immediately and in full. If these conditions aren't met, the FOK order is canceled.
The Bottom Line
If you're not strictly buying and holding your investments, the different types of investment orders can help you gain a little more control over your trading. Understanding how they work can help you develop a strategy with your trades to potentially increase your gains and minimize your losses.
Remember, though, that trying to time the market is often a mistake and can result in greater losses, especially if you're not an experienced investor. If you want to learn how to use different investment orders for your portfolio, start small. And if you feel like you need some assistance, take steps to find a good financial advisor who can help you accomplish your goals.