Lesson 5.3 · 3 of 5 · Exchanges, indices and orders
Market, limit, stop and stop-limit orders: when to use each one
A market order buys straight away at whatever price is available; a limit order buys only at your price or lower. A stop order springs into action when the price reaches a level you chose, usually to cap a loss. A stop-limit adds a minimum price, but it may never fill.
Terms in this lesson
- Market order
- You buy or sell right away, at the best price available at that moment.
- Limit order
- You buy only at your price or cheaper; you sell only at your price or higher.
- Stop-loss
- An order that sells automatically if the price falls to a level you choose.
- Stop-limit order
- Like a stop-loss, but it only sells down to a minimum price you choose.
Opening question
A share costs $102 right now. You only want to buy it if it drops to $96. Which order do you place?
A limit order waits in the order book and fills only at $96 or less. A market order would fill now, at about $102. A sell stop is for shares you already own.
It does not matter if you get it wrong: trying first helps you remember.
What is a market order
Definition
What is a market order?
You buy or sell now, at the best price on offer.
A market order fills almost certainly and almost instantly. You don’t know the exact price in advance: you take the best offer in the order book at that moment. For large shares the gap from the quoted price is usually small. For thinly traded shares, or in hectic minutes, it can be large: that is slippage.
Myth or fact?
“A market order always fills at exactly the price I see on screen.”
Myth. A market order guarantees the fill, not the price. The price can move between your tap and the execution, and a large order can eat into pricier offers.
What is a limit order
Definition
What is a limit order?
Buy only at your price or lower. Sell only at your price or higher.
You set the highest price you’ll pay or the lowest you’ll accept. The order sits in the book until someone takes it, it expires or you cancel it. The upside: you control the price. The catch: if the market never gets there, you buy nothing.
Check yourself
You have a limit order to buy at $96. The share dips to $96.50, then climbs to $105. What happened to your order?
A buy limit fills only at $96 or below. The price stopped at $96.50, so the order is still waiting. That is the risk of a limit: you can miss a rally for 50 cents.
What are stop and stop-limit orders
Definition
What is a stop order?
An order that waits until the price hits your level, then becomes a market order.
It is most often used as a stop-loss: you bought at $102 and set a sell stop at $99. If the price falls to $99, the order triggers and sells at market. Watch out: if the market opens straight below, say at $97.60, you sell at about $97.60, not $99.
A stop-limit order has the same trigger but becomes a limit order instead of a market order. With the stop at $99 and the limit at $98.50, it triggers at $99 but sells only at $98.50 or higher.
Stopbecomes a market order
- Almost certain to fill
- The price can be well below your stop
Stop-limitbecomes a limit order
- Never sells below your limit
- May not fill while the price keeps falling
Check yourself
You have a sell stop at $99. On the highlighted day the share opens at $97.60. What happens to your order?
This exercise is in the free account, where we also save your progress.
Create a free accountWork it out
You hold 50 shares with a sell stop at $99. The order fills at $97.60. How many dollars less do you receive than if it had sold at $99?
This exercise is in the free account, where we also save your progress.
Create a free accountWhich order to use and when
- Market: fills now
- Limit fills
- Stop placed at 99
- Stop sells at 97.60
The price hovers around 102, where the market order fills straight away. It then drops to 95.60, below the buy limit of 96, which fills. The price climbs to almost 108; only now is the sell stop placed at 99. It then falls back towards 100.60. The next day the market gaps down to open at 97.60, below the 99 stop, and the stop sells at about 97.60. The price then keeps sliding towards 94.
| You want to... | The order |
|---|---|
| buy a large, heavily traded share now | Market |
| buy only if the price drops to a level | Buy limit |
| sell only if the price rises to a level | Sell limit |
| cap your loss, even at a worse price | Stop (stop-loss) |
| cap your loss without selling below a price | Stop-limit |
The guide to order types shows what each one looks like in a broker’s app.
Put in order
Put the life of a stop-loss in order.
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
You want to buy a share that costs $102 right now. Which order do you place?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- A market order guarantees the fill, not the price; a limit order guarantees the price, not the fill.
- A stop triggers at your level and sells at market, even well below the stop if the price gaps down.
- A stop-limit never sells below your limit, but it may not fill at all.
You reached the end
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Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: standard order definitions used by exchanges and regulated brokers. The charts are teaching diagrams, not real prices.