Quick Answer
Market orders fill now at any price; limit orders only at your price or better; stop orders trigger a market order once hit. Buy limits sit below the market, sell limits above. Long positions risk a limited loss, short positions an unlimited one. Commission means agency, markup or markdown means principal.
The whole unit on one sheet: how orders work, who takes on which risk, and the distinctions the exam loves to test.
Order Types at a Glance
| Order | What It Does | Key Risk |
|---|---|---|
| Market | Fills immediately at the best available price | Price uncertainty: speed, no price control |
| Limit | Fills only at a specified price or better | May never execute |
| Stop (stop-loss) | Becomes a market order once the stop price is hit | Fill price can differ far from the stop |
| Stop-limit | Becomes a limit order once the stop price is hit | May not execute at all |
Where Limits and Stops Go
- Buy limit = below the market (buy cheaper).
- Sell limit = above the market (sell higher).
- Buy stop = above the market (short sellers use it to cap losses).
- Sell stop = below the market (classic stop-loss protection).
Time-in-Force
- Day order: expires at the close; the default if none is specified.
- Good-til-canceled (GTC): stays open until filled or canceled.
- Immediate-or-cancel (IOC): fill now; unfilled portion canceled (partials allowed).
- Fill-or-kill (FOK): fill in full immediately or cancel the whole order.
- All-or-none (AON): fill in full, but it can wait for liquidity.
The One-Liners That Win Points
- Market = execute now. Limit = my price or better. Stop = trigger, then market.
- Commission = agency = broker. Markup/markdown = principal = dealer.
- Customers buy at the ask (higher), sell at the bid (lower); the spread is the cost of immediacy.
- Long = own it = limited loss. Short = borrow and sell = unlimited loss.
- Solicited = the rep recommended it (full suitability + Reg BI). Unsolicited = customer's idea (no Reg BI).
- Bullish = expect a rise. Bearish = expect a fall. Selling a put is bullish; selling a call is bearish/neutral.
Bid, Ask, and Spread
- Bid = highest price a buyer will pay; ask (offer) = lowest a seller will accept.
- Ask is always higher than the bid; they are never the same dollar amount.
- Narrow spread = high liquidity; wide spread = low liquidity.
Trade Capacity: Principal vs. Agency
- Principal (dealer): trades from its own inventory, is the counterparty, earns a markup (selling to you) or markdown (buying from you).
- Agency (broker): matches you with another party, earns a commission, owes best execution.
- Riskless principal: buys in the market then immediately sells to the customer; technically principal, disclosed as principal.
- Dual capacity (both principal and agent on one trade) requires disclosure and customer consent.
Discretionary vs. Non-Discretionary
- Discretionary = the rep decides Asset, Action, or Amount (any one triggers it).
- Requires written authorization BEFORE the first trade; a principal approves each trade promptly; heightened supervision for churning.
- Time and price exception: deciding only when or at what price is NOT discretionary, and it expires at the end of that business day.
Numbers to Lock In
| Item | Value |
|---|---|
| Long position max loss | 100% of purchase price (stock to zero) |
| Short position max loss | Unlimited |
| Time/price discretion window | End of the business day granted |
Memory Aid
- Discretionary = the three A's: Asset, Action, Amount. If the rep picks any one, it is discretionary.
Top Gotchas
- A stop order does NOT guarantee a fill price: once triggered it is a market order.
- Short sales and naked calls carry unlimited loss because price can rise without bound; option buyers only risk the premium.
- Short selling requires a margin account; you cannot short in a cash account.
- The solicited/unsolicited trigger is who recommended, not who placed the order; mismarking a ticket is its own violation.
- "Buy 100 Apple whenever the price is right" is not discretionary (asset, action, amount all set); "Invest $10,000 in something good" is.
One-Breath Recap
Pick the order type for the price control you want, place the trigger on the correct side of the market, know that long risk is capped while short risk is not, read compensation to spot capacity, and match the market outlook to the strategy. Nail those lines and the trading questions answer themselves.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Orders and Strategies unit for the complete lesson.