When entering a stock market order at my broker, I always used to enter a “market” order. I also had the choice of a limit order, stop order or stop-limit order, but I didn’t know any better.
What are the differences between those types of orders? In this blog post, I explain them briefly.
Market order
Using a market order, you buy or sell securities at the price available at that time. A market order has the advantage of a quick execution, if there is sufficient supply or demand on the stock exchange.
The disadvantage of a market order is that you buy or sell at any price, even if the security rises or falls sharply in a very short time, as in a flash crash(1)or a short squeeze(2). The chance is small, but it exists…
Limit order
With a limit order, you set a limit price when buying or selling. When buying, the order is only executed at a price lower than the limit price. When selling, the order is only executed at a higher price than the limit price. The advantage of a limit order is that you have more control over the buying or selling price, the disadvantage is that the (immediate) execution of the order is not guaranteed.
Example: you wish to buy 10 units of ETF A. The current price is 95 euros. You set a limit price of 97 euros. The order will be executed for any market price below 97 euros.
Stop-loss order
If you choose a stop-loss order, your securities are automatically bought or sold if the price reaches a pre-set stop price. Note: when this stop price is reached, the order changes into a market order and you no longer have any influence on the buying or selling price. A stop-loss order is mainly used to protect your investments against large price drops.
For example: the current price of share B is 95 euros. You want to sell 10 B shares if the market price falls to 80 euros. For this purpose, you set a stop price of 80 euros. When the market price reaches 80 euro, a market order for 10 B shares is automatically executed, with the risk that the price may fall further.
Stop-limit order
A stop-limit order is like a stop-loss order, with the difference that once the stop price is reached, a limit order is executed (instead of a market order for a stop-loss).
Example: the current price of the share B is 95 euros. You want to sell 10 B shares if the market price falls to 80 euros. For this purpose, you set a stop price of 80 euros, and you set a limit price of 78 euros. When the market reaches 80 euros, a limit order of 10 B shares is executed, and this order is only executed for each market price higher than 78 euros.
I no longer use market orders for my stock market transactions, for each purchase I set a limit order with the limit price being a few percent above the current stock price.
What type of stock market order do you use? Let us know in the comments!
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).
Sources :
(1) Wikipedia contributors. (n.d.). Flash crash. Wikipedia. Consulted on 2021, July 20, from https://en.wikipedia.org/wiki/Flash_crash
(2) Wikipedia contributors. (n.d.). Short squeeze. Wikipedia. Geraadpleegd op 2021, July 20, from https://en.wikipedia.org/wiki/Short_squeeze