Looking at the types of Orders in Buying and Selling Financial Securities or stock, we note that investors have several options when it comes to placing an order to buy or sell securities.
Types of Orders
A market order is an order to buy or sell a stock at the current market price. Unless you specify otherwise, your broker will enter your order as a market order. The advantage of a market order is you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers). A market order may also be less expensive than a limit order. The disadvantage is the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by your broker. This may be especially true in fast-moving markets where stock prices are more volatile.
A limit order
A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Limit orders may never be executed because the market price may quickly surpass your limit before your order can be filled. Some firms may charge you more for executing a limit order than a market order. But by using a limit order you also protect yourself from buying the stock at too high a price.
A stop order
A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order. Buy Stop Order — Investors typically use a stop order when buying stock to limit a loss or protect a profit on short sale. The order is entered at a stop price that is always above the current market price. Sell Stop Order — A sell stop order helps investors to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell is always placed below the current market price. The advantage of a stop order is you don’t have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock’s price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price