Trading | June 10, 2019

Stock Order Types and Conditions: An Overview

Many factors can affect trade executions. It's the knowledgeable investor—making decisions with a full understanding of the implications of various stock order types and conditions—who can make the most of the stock market's potential.

Order types

Whether you're buying or selling a security, the type of order you place can have a significant effect on the execution you receive. While some market factors are beyond your control, if you place your order with a clear understanding of how it will be received in the marketplace, you're more likely to get the results you want. Here we'll look at common stock order types, including market orders, limit orders, and stop-loss orders.

What is a market order and how does it work?

A market order is an order to buy or sell a stock at the market's best available current price. A market order typically guarantees execution but does not guarantee a specific price. Market orders are optimal when the primary concern is immediately executing the trade. A market order is generally appropriate when you think a stock is suitably priced, when you're sure you want a fill on your order, or when you want immediate execution.

A few caveats: A stock's quote typically includes the highest bid (for sellers), lowest offer (for buyers), and the most recent trade price. The most recent trade price may not necessarily be current, however, particularly in the case of less-liquid stocks, whose last trade may have occurred minutes or hours ago, or in fast-moving markets when stock prices can change rapidly in a short period of time. When placing a market order, therefore, the current bid and offer prices are generally of greater value than the last trade price.

Market orders should generally be placed only while the market is open. A market order placed when markets are closed would be executed at the next opening, at which time the stock's price could be significantly different from its prior close. Between market sessions, numerous factors can impact a stock's price, such as the release of earnings, company news or economic data, or unexpected events that affect an entire industry, sector or the whole market.

What is a limit order and how does it work?

A limit orderis an order to buy or sell a stock with a restriction on the maximum price to be paid or the minimum price to be received (the "limit").

If the order is filled, it will only be at the specified limit price or better. However, execution is not guaranteed, because even if the stock reaches the specified limit price, it's possible that orders ahead of yours may exhaust the availability of shares at that price, so your order cannot be executed. (Limit orders are generally executed on a first-come, first-served basis.)

There are other reasons a limit order may not be executed even if the limit price is reached, including price correctionsor executions that occurred at different market venues. If a limit order is only partially executed, the remainder of the order is entered into what's called the limit order book and becomes part of the current displayed quote.

What is a stop order and how does it work?

A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop").

A stop order serves as a kind of automatic entry or exit trigger upon a certain level of price movement in a specified direction; it is often used to attempt to protect an unrealized gain or minimize a loss. However, while it provides some level of price control, like a market order, a stop order could be executed at a price much different than expected in a fast-moving market.

A sell stop order is entered with a stop price below the current market price. Here's an example of how it might be used: You bought a stock at $150; its current price is $190. To limit losses arising from a future plunge in the stock price, you enter a stop order to sell at a stop price of $185. If the stock's bid price falls to $185, or if an execution occurs at $185, or lower, at the same venue where your order resides, your stop order is triggered and a market order is entered to sell at the next available market price. Be aware of pricing gaps, which can sometimes occur between trading sessions or during trading halts. The execution price can be higher or lower than the stop's trigger price, which only denotes when the order should be submitted.

Beyond standard stop orders are two variations: stop-limit orders and trailing stop orders.

  • A stop-limit order is a combination of a stop order and a limit order to buy or sell a stock at a specified limit price (or better) only after the stop price has been reached. In most cases, the stop price on a sell stop-limit order will be equal to or above the limit price. As the stock declines in value and trades at or below the stop price, the order will trigger and become a limit order; if the order is filled, it will only be at the limit price or better. But like any limit order, execution is not assured. For a sell stop-limit order, setting a limit price lower than the stop price can increase the likelihood of its execution. And in a rapidly declining market, the larger the gap between the stop price and the limit price, the greater the likelihood of execution.
  • A trailing stop order is an order in which the stop price will track, or "trail," either the current ask or current bid by a specified percentage or dollar amount, as opposed to being entered at a specified price. Unlike stop and stop-limit orders, which are entered and held in the marketplace, a trailing stop order is held on a broker/dealer's server until the trigger is reached, at which time it is sent to the marketplace. The primary benefit of this type of order is that it doesn't have to be cancelled and re-entered as the price of the stock increases.Note, the trailing stop order type is available on all Schwab trading platforms except for the Schwab mobile trading platform.

The table below provides an overview of the similarities and differences among the various types of stop orders.

Stop order Stop-limit order Trailing stop order
Offers execution protection only, not price Offers price protection only, not execution Offers execution protection only, not price
Must be manually cancelled and re-entered Automatically adjusts when security price increases
Held on the book at the execution venue Held on broker/dealer's server
No costs if not executed
Tends to work well in slowly declining markets
Generally does not work well in halted or gapping markets

Source: Schwab Center for Financial Research

Order instructions and qualifiers

In addition to the ability to specify an order type, you can also stipulate one or more conditions—based on time, volume and price constraints—to meet specific objectives. Here's a rundown of the main types of special instructions and qualifications.

Time-in-force orders

These specify how long an order will remain active before being executed or expired.

  • Day-only orders are good for the current trading session only. This does not include any extended-hours sessions that occur before 9:30 a.m. or after 4:00 p.m. Eastern Time (ET). Extended-hours orders must be specified as such.
  • Good-until-cancelled (GTC) orders are good for 60 calendar days at Schwab. Like day-only orders, GTC orders apply only to the regular 9:30 a.m. to 4:00 p.m. ET trading session.
  • Fill-or-kill (FOK) orders require that the order be immediately filled in its entirety. If this is not possible, the entire order is cancelled. This is one way to find hidden liquidity.
  • Immediate-or-cancel (IOC) orders require that any part of an order that can be filled immediately is filled, and any remaining shares are cancelled.

Order qualifiers

These guidelines modify the execution conditions of an order based on volume, time and price constraints. They include:

  • Minimum-quantity orders specify that you require a minimum number of shares to be executed in order to complete a transaction. If the minimum is not available, minimum quantity orders specify that none of the order should be executed. For example, if you enter an order to buy 5,000 shares with a minimum quantity of 1,000 shares, you are requesting that none of the order be executed unless at least 1,000 shares can be bought.

    While this order qualifier may help prevent a fill of 100 shares on a 5,000-share order, it may also prevent your order from being executed at all, as this type of qualifier is prohibited on orders sent to the limit order book. It would also require that at least 1,000 shares be executed at a single venue, which may not be possible, although 1,000 shares might be available if the order was broken up and sent to multiple venues. You should be careful with minimum-quantity qualifiers, as the disadvantages may outweigh the advantages.
  • Do-not-reduce (DNR) orders specify that a broker not adjust the limit price of the order when the stock is adjusted on the ex-dividend date.For example, if you enter a GTC limit order to buy XYZ at $193 and, a week later, the stock reaches ex-dividend date for an upcoming dividend payment of $0.50, your limit order would normally be reduced to $192.50.
  • All-or-none (AON) orders specify that the order you place must be executed in its entirety or not at all. Example: If you enter an AON order to buy 5,000 shares, you are requesting that none of the order be executed unless it is for the entire 5,000 shares. While AON order qualifiers may help prevent a partial fill, they may also prevent your order from being executed at all, because they cannot be held on the exchange limit order book. AON orders also require that the entire order be executed at a single venue, which may not be possible, although execution might be possible if the order were broken up and sent to multiple venues. As with minimum-quantity orders, be careful with all-or-nothing qualifiers—the drawbacks may outweigh the benefits.

Now that you have an understanding of the various stock order types and conditions, and the factors that affect them, you can make better informed investment decisions and work toward making the most of the stock market's potential.