Order Types
There are myriad various order types, and the specific ones available to a trader will depend on his broker or the exchange where he is trading. The most common are:
Limit: The limit order specifies a price the trader is willing to pay up to, but no greater than (in the case of a buy), or welling to sell down to, but no less than (in the case of a sell). It is called a limit order because the trader has limited his risk of a fill at an undesirable price. In the example above, we specified a buy price of $66.52. If our order arrived at the market, and there was a sell order available at a lower price, we would transact at that lower price. This is called price improvement. With a limit order we do not know our transaction price ahead of time, but we do know that it can never be worse than our stated price. Limit orders are the most common and are widely used in the examples throughout this course.
Market: With a market order, a price is not specified. The order is immediately executed against whatever the best price is in the market at the time of arrival. The benefit of a market order is that a complete fill is guaranteed. The drawback of a market order is that the price at which you transact is not guaranteed, and in fact can be much worse than expected. Especially in a fast moving market, the best available price you see at the time of order entry can be drastically different from the best price available when your order arrives at the exchange.
Stop Loss: A stop loss order is used to limit the risk of loss for a trader that already has a pre-existing position. Let's say you own 100 shares of Microsoft at a price of $65.00. If the market goes down to $60.00, you wish to exit the position by selling your shares, because this is the maximum loss you are willing to suffer. You then enter a stop loss order with a stop or trigger price of $60.00. You may also specify the worst price you are willing to sell down to, or a sell limit, in which case your stop loss order becomes a stop limit order. For example:
Type |
Security |
Action |
Stop |
Limit |
Quantity |
Stop Limit |
MSFT |
Sell |
60.00 |
59.80 |
100 |
Time In Force
Again, the options on time-in-force (or duration), vary widely from market to market, but a few are found almost universally.
Day: Order is good until end of the trading day, and if not filled will be cancelled at market close.
Good Til Cancelled: Order is considered live until it is filled or manually cancelled by the trader.
Immediate or Cancel: Order must be filled partially or in full immediately. Any unfilled portion is cancelled.
Fill or Kill: The order must be filled in it's entirety immediately, otherwise it is cancelled.
Day: Order is good until end of the trading day, and if not filled will be cancelled at market close.
Good Til Cancelled: Order is considered live until it is filled or manually cancelled by the trader.
Immediate or Cancel: Order must be filled partially or in full immediately. Any unfilled portion is cancelled.
Fill or Kill: The order must be filled in it's entirety immediately, otherwise it is cancelled.