Types of Orders

An order is a customer's instruction to a broker-dealer to buy or sell a security under specified conditions. Orders are classified by how they control price, and the exam frequently tests your ability to distinguish between them.

Market Orders

• A market order executes immediately at the best available price
• Provides certainty of execution but no price guarantee
• This is the default order type when no price instruction is given
• In a fast-moving market, the execution price may differ significantly from the last quoted price; this is called slippage

When to use: When execution speed matters more than price precision.

Exam Tip: Gotchas

• A market order guarantees execution but NOT price. A limit order guarantees price but NOT execution. The exam loves to test this distinction.

Limit Orders

• A limit order executes only at a specified price or better
• Provides price certainty but no guarantee of execution
• If the order cannot be immediately filled, it sits on the order book waiting for the target price

Placement rules:

• Buy limit: placed below market price. The customer wants to buy at a lower price.
• Sell limit: placed above market price. The customer wants to sell at a higher price.

Key logic: A buy limit is placed below the market because the customer is saying "I'll buy, but only if the price drops to my target." A sell limit is placed above because the customer is saying "I'll sell, but only if the price rises to my target."

Stop Orders (Stop-Loss Orders)

• A stop order becomes a market order once the stop price is reached or passed
• Two-step process: (1) price hits stop trigger, then (2) order executes as a market order at the next available price
• Once triggered, there is no price guarantee - the fill could be far from the stop price in a fast or gapped market

Placement rules:

• Sell stop: placed below market price. Protects a long position / limits losses.
• Buy stop: placed above market price. Protects a short position / used to enter on a breakout.

Memory aid: Stop orders are placed on the "wrong side" of the market compared to limits. Sell stops go below (to catch falling prices); buy stops go above (to catch rising prices).

Exam Tip: Gotchas

• A stop order does NOT guarantee a specific execution price. Once triggered, it becomes a market order and fills at the next available price, which could be far from the stop price in a fast-moving or gapped market.
• Buy limits and sell stops are both placed BELOW the market, but for different reasons (buying cheaper vs. protecting a long position). Buy stops and sell limits are both placed ABOVE the market, also for different reasons (protecting a short position vs. selling higher).

Stop-Limit Orders

• A stop-limit order becomes a limit order (not a market order) once the stop price is triggered
• Contains two prices: a stop price (trigger) and a limit price (worst acceptable fill)
• More precise than a plain stop order, but may never execute if the price blows past the limit after triggering

Risk: In a fast-moving market, the stock may gap past both the stop and limit prices, leaving the order unfilled entirely.

Exam Tip: Gotchas

• A stop-limit avoids the price risk of a plain stop, but introduces execution risk. A stop order will always fill (once triggered); a stop-limit order may never fill if the price blows past the limit.

Order Placement Summary

Think of it this way: Each order type trades off price control for execution certainty. Market orders get you in or out right away but at whatever price is available. Limit orders lock in your price but might never fill. Stop orders trigger automatically but become market orders (no price control). Stop-limit orders give you both a trigger and a price floor/ceiling, but they might not fill at all.