Order types: what each one guarantees, and what it does not
Placing a stock market order is not only about choosing a security and a quantity: you also have to choose how the order will be executed. The order type determines what you control, the price or the execution, and what you give up. This article presents the 4 most common order types, their differences and the associated risks. Exact names vary by broker and trading venue: always read your own broker's documentation.
The market order
A market order is designed to be executed immediately, at the best prices available in the order book, including across several price levels. Execution is favoured, without controlling the price.
Fictitious example. In the order book, the best bid is €50.00 and the best ask is €50.05. A buy market order will be executed around €50.05, or at higher prices if the quantity requested exceeds what is offered at that level. On a thinly traded stock, the gap between quoted prices can be wider, and the price obtained can move clearly away from the one you had in mind.
Keep in mind: fast and very likely to be executed, but risky on illiquid stocks or in turbulent periods.
The limit order
A limit order sets a maximum price when buying or a minimum price when selling. It will only be executed at that price or a more favourable one. A worst-case price is guaranteed (the limit, or a better price), but not the execution: if the market never reaches the requested price, the order has no effect.
Fictitious example. A buy limit order at €49 on a share trading at €50 will only be executed if the price falls to €49 or below. If the price rises without ever reaching it, the order is not executed.
The stop order
A stop order stays dormant until the price reaches a set threshold. At that point, it becomes a market order. It is often used to limit a loss: on the sell side it is called a "stop loss", with no guarantee of capping the loss at the chosen threshold.
Fictitious example. You hold a share bought at €50 and place a sell stop order at €45. If the price touches €45, the order goes to the market. The execution price can be below €45 if the price falls sharply, for example at the open after bad news: this is called slippage.
The stop-limit order
The stop-limit order combines both logics: a threshold triggers the order, which then becomes a limit order rather than a market order. The price is bounded, but the order may not be executed if the price moves through the range very quickly.
The validity period of an order
An order also has a lifespan:
- Valid for the day: it lapses at the close of the session if it has not been executed.
- Valid until a date or until cancelled: it stays active over several sessions. You then need to remember to monitor or cancel it.
The risks to know
- Slippage: the execution price differs from the threshold, especially on an illiquid stock or on a price gap at the open.
- Partial execution: a limit order may be executed for only part of the quantity.
- The effect of thresholds that are too close: a stop threshold placed too near the price can be touched by a simple fluctuation, after which the price moves back.
- Fees: some order types are charged differently depending on the broker.
Each order type answers a different constraint. None is "better" in itself: the choice depends on the liquidity of the security, on what you are trying to control and on timing.
Key takeaways
- Market: execution favoured, price not controlled.
- Limit: price guaranteed, execution not guaranteed.
- Stop: dormant, then executed at market, with a risk of slippage.
- Stop-limit: dormant, then limited, with a risk of non-execution.
- The validity period matters as much as the type.
In Earnnest, trading plans let you prepare price levels but do not execute any order: the order is placed with your broker.
This article is for information and education only and does not constitute personalised investment advice. The figures in the examples are fictitious and illustrative. Order types and their names depend on each broker and trading venue.