Trading order types explained

Learn how to use trading orders to manage risk and get the best price for shares when you trade.

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Finding your feet as an investor but thrown by some of the lingo? Here’s what you need to know about the different types of stock market orders, such as “stop loss” and “limit”, and how to use them to help you avoid making expensive mistakes.

What is a trading order?

A trading order is an instruction you give your trading platform or broker when you want to buy or sell an investment. It allows you greater control because you can set a pre-programmed command. Then, your trading move happens automatically when a price hits the target you’ve specified, meaning you don’t have to sit in front of a screen all day watching prices go up and down and waiting for the right moment to buy or sell. You’ll usually pay a fee for certain types of order, which tend to be the more sophisticated ones such as take-profit.

Carrying out a trade is known as “executing” an order.

Most common trading order types

The 3 main orders are: market, limit, and stop orders. But, there are some crossovers and variations within the broader categories.

Market order

This is the most straightforward type. It’s an instruction to make your trade at the next best available price on the market.

In practice, this next available price could be higher or lower than what you were expecting. Sometimes by a little, and sometimes quite a lot. Stock markets can move quickly and the difference will depend on the volatility and the time of day you make the trade. This difference is known as “‘slippage'”.

Typically, market orders are the quickest to fulfil, because it’s an easy way to match up buyers and sellers. But, a market order means you forfeit direct control over the trade price.

A market order is a good option if you want to make a quick trade and you’re not bothered about getting the absolute best deal.

Limit order

When you select this, you set a price limit on how much you’re willing to buy or sell an asset for. This means a maximum price for buying or a minimum price for selling.

The order will only be fulfilled if it can take place at the limit you’ve set, or at a better price if possible.

This gives you more control over the exact exchange price. But, the trade won’t happen if your target isn’t met.

Stop order, including stop-loss

This is a friendly relative of the market order. The difference is, you set a specific target price at which the trade converts into a market order.

Instead of carrying out a trade for an immediate price the market throws your way, you have more control. Depending on whether you’re looking to buy or sell once a price target is met, you can use a buy-stop or sell-stop.

If you’re setting a stop order, it must be higher than the current price for a buy order and lower than the current price for a sell order.

A sell-stop order is often referred to as a “stop-loss” order and it can help limit potential losses if prices are plunging.

Less common trading order types

Stop-limit order

This combines a stop order and a limit order to really zero in on your ideal price.

You open the trade by setting 2 prices: an upper and lower level for your trade to work within. The stop price will be your starting target for the trade, and then your limit will be the outside price target.

It’s also common to specify a time frame for the trade. The most common time restrictions to use are “day” or “good-til-cancelled” (GTC).

A major benefit is that this type of order can give you the best of both worlds, limiting your downside or locking in profits within a range you’re comfortable with.

The drawback is that if the price moves up or down by a big chunk, falling outside your range before it’s filled, the trade won’t execute.

Trailing stop order

For this type, you can set your price to move without exiting your trade.

To start, you select a percentage or pound amount that’s different to the market price. Then, choose if you want the trailing stop order to convert into a market or limit order.

If the trade is working out as you hoped, you can continue to profit as the price moves. But, if the wind blows the other way, this order attempts to close the trade when the price reaches your specified difference.

Market-if-touched order

This is similar to a limit order, except there’s no guarantee on the price. You set a price beforehand, then, if the asset hits it, the trade automatically converts into a market order.

Doing this helps speed up a trade, but could still lead to slippage. Because, you only control the price that triggers the conversion to a market order. The best market price could then move as the broker attempts to execute.

Limit-if-touched order (LIT)

You can also use an “LIT” to convert your order into a limit rather than a market order.

You set your price when opening the trade, and once that’s hit, the trade shifts into a limit order. But, if no one is willing to buy or sell at your price, it’s possible the trade won’t fully execute. It’s possible that your platform may be able to execute some of the trade – for example if you want to buy 50 shares and your platform holds 20, it might sell you those.

Take-profit

This does exactly what it says on the tin. A trade will automatically close and take profit once it reaches a specific price level that you’ve set.

If the price never hits your target, the trade won’t execute.

When to use each type of trade

To look at this another way, we’ve set out a few trading scenarios that show each type of order in action. We’ve used the ticker for Apple stock, which is AAPL.

Trading order typeWhen to use
MarketYou’re looking to make a quick trade, buying AAPL shares at the latest price.
LimitYou want to buy AAPL stock, but only for a certain price. If it costs more than that, you’re not interested.
StopYou set a sell-stop/stop-loss price to limit your losses. If the AAPL price falls to that level, your broker sells at the next available market price.
Stop-limitYou set a sell-stop/stop-loss price but only to sell your shares within a specified range. This helps to avoid slippage. Ideal if you’re willing to keep holding AAPL stock if you can’t get your desired price.
Trailing stopYou buy AAPL stock, confident the price will rise. So, you set a trailing stop order that moves automatically as the price goes up.
Market-if-touchedYou’re happy to sell your AAPL stock as quickly as possible once it touches a certain price. You don’t mind if the price moves further, you just want out of the trade as soon as possible.
Limit-if-touchedYou want to sell your AAPL stock if the price goes below a certain level, but only for a price you’re happy with. If you can’t get that price, you will hold on to your shares.
Take profitYou want to sell your AAPL stock if it goes up by an exact percentage. Locking in your trade action without any price flexibility.

How to use a stock market trading order

Using these controls can feel daunting when you first want to make a trade. So, here’s a brief step-by-step guide on the basic way to use trading orders:

  • Open your trading platform and deposit funds.
  • Find the asset that you want to buy or sell.
  • Decide which trading order type you want to use.
  • Choose how much you want to invest, which could include selecting a price range or time frame.
  • Submit your order and wait for it to be fulfilled.

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How do you pick the right order type?

Zoe Stabler

Finder expert Zoe Stabler answers

First, you need to decide what you want from the trade. Here are a few simple questions to run through:

  • Is this a fast trade or a longer investment?
  • Are you looking to limit losses or maximise profits?
  • What’s more important, getting the right price or executing a trade quickly?
  • Once your motivation is clear, this will help narrow down the best trading order type to use.

Pros and cons of trading orders

Pros
  • Limit losses and manage stock market risk.
  • Greater control over the price when buying or selling.
  • Spend less time watching prices and monitoring trades.
Cons
  • Human error can be costly.
  • Slightly overwhelming and complex.
  • Sometimes there’s no guarantee a trade will execute.

Bottom line

Using different types of trading orders means you get more control over trade prices, but with great power comes great responsibility. The flexibility means it’s up to you to select the right stock market order type, or it could be a costly mistake.

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