Stock and ETF order types: Understanding market, limit and stop orders

What are stock and ETF order types?

A stock or ETF order is an instruction submitted to a trading platform to buy or sell a specific security. Orders define how a trade should be executed, including the acceptable price and the conditions under which execution occurs.

Order types help structure trades in different market environments. Some orders prioritize speed of execution, while others focus on price parameters. Market, limit and stop orders are among the most widely used order types for US-listed stocks and ETFs.

It’s important to distinguish between order type and order duration. Order type determines how a trade executes, while duration determines how long the order remains active. For example, a day order expires at the end of the daily trading session, while a good-til-cancelled (GTC) order remains open until filled or cancelled.

For example, let’s say two investors place orders for the same stock at the same time. One uses a market order and the other uses a limit order. Even though the orders are placed simultaneously, the execution price and timing may differ based on the order type selected.

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What is a market order?

A market order is an instruction to buy or sell a stock or ETF immediately at the best available price in the market. This order type prioritizes speed and execution over price certainty.

When a market order is placed, it’s matched with existing buy or sell orders already available in the market. The final execution price depends on current market conditions, including supply, demand and trading volume at that moment.

Market orders are commonly associated with highly liquid securities, where large numbers of buyers and sellers are active. In these cases, the difference between expected and actual execution prices may be minimal. However, in fast-moving or less liquid markets, price differences – referred to as slippage – may occur.

For ETFs, liquidity can vary depending on trading volume and underlying assets. Market orders for thinly traded ETFs may experience wider price variations compared to those for heavily traded ETFs.

What is a limit order?

A limit order is an instruction to buy or sell a security at a specified price or better. When placing a buy limit order, the maximum purchase price is defined. When placing a sell limit order, the minimum acceptable sale price is also defined.

Limit orders prioritize price parameters over speed of execution. The order will only execute if market prices meet the specified limit. If the market doesn’t reach that price, the order may remain open or expire, depending on the order duration.

Unlike market orders, limit orders don’t execute immediately unless the specified price is available at the time the order is placed. This means execution isn’t guaranteed. Market conditions, liquidity and price movements all influence whether the order is filled.

Limit orders can be submitted with different time-in-force instructions, such as day orders or GTC orders. These settings determine how long the order remains active if it isn’t executed.

For example, if an investor places a limit order to buy 10 shares of XYZ at $100 or less and the stock trades above $100, the order won’t execute.

What are stop and stop-limit orders?

Stop orders are designed to activate once a specified price level, known as the stop price, is reached. After activation, the order becomes a market order and executes at the best available price.

A stop-limit order combines features of both stop and limit orders. When the stop price is reached, the order converts into a limit order instead of a market order. This adds a price boundary but may affect execution.

Stop orders are often described in terms of stop-loss or stop-entry mechanics, depending on whether they’re used to sell or buy. The terminology refers to the trigger mechanism rather than a guarantee of outcome.

For example, say an investor sets a stop order to sell 10 shares of ABC if the price drops to $80. Once the stock trades at $80, the order becomes a market order.

With stop-limit orders, rapid price movements may result in the limit price not being met, meaning the order may remain unexecuted.

Choosing an order type

Different order types serve different purposes based on how trades are structured. Factors such as market volatility, liquidity and timing can influence how an order executes.

Order type selection influences how a trade is carried out, not whether an investment is profitable. Execution price, timing and fill certainty can vary depending on the order used and prevailing market conditions.

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