Investing – Types of orders in stock market
As a novice stock market investor, I often find it confusing about different types of order when buying ordinary stocks. Here are the information I collected for the different kinds of orders.
Tl; dr;
- Stop order: triggers buy/sell stock when stock price reaches a predefined price. When triggered, stop order becomes market order.
- Market order: matched the closest orders in the current market, the condition is different between buying and selling.
- Limit order: Sell price >= trigger price, or buy price <= trigger price.
Stop order
Probably the most complicated one when it comes to buying stock in the normal way.
Supposed that you want to buy 10 stock X, currently trading at $9. You put in a stop order at $10. The market depth is as follow.
Now, the order will be fulfilled as follows:
- 4 stocks for $10 each
- 1 stock for $9 each
- 3 stock for $11 each
- 2 stock for $12 each
Why is this happening?
The stop order triggers at $10, so it starts buying all stocks that are selling at $10, in this case there are only 4 stock. After that, the order becomes a market order (more on that below). And with market order, it will buy stocks from lowest to highest price available in the market, until the buy order is fulfilled.
Market order
When you buy a stock with market order, you don’t care how much you’re paying for it, as long as someone is willing to sell, you are going to buy. The same happens when you sell a stock with market order.
Let’s examine the same market depth, only difference is that the buying price now is the market price. The order of buying is as follows
- 1 stock for $9
- 4 stock for $10
- 3 stock for $11
- 2 stock for $12
As we can see, we end up with the same total as the example in Stop order, however the order of purchasing is different. We buy it from the lowest price first, and work our way up. In the sell order, the order is reversed, we sell with the highest buying price first, then work our way down.
Limit order
This is easy to remember, the limit order only allows the broker to buy a stock price when it reaches the trigger price, or lower. And to sell when it reaches the trigger price or higher.
With the above market depth, the buy order is as follows:
- 1 stock for $9
- 4 stock for $10
- 3 stock for $11
- Remaining 2 stock in the buy order
The stock broker will not buy any stock that is priced above $11.
Summary
The 3 different types of orders are the most popular order types in buying and selling ordinary stocks. There are a lot more that we can explore on other form of trading stocks. However they are more advanced and allow you to understand the instruments deeper to use them.
“Risks come from not knowing what you’re doing.” – Warren Buffett
By Tuan Nguyen
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