Types of Orders
An order is an instruction from a customer to a broker-dealer to buy or sell a security under specified conditions. Orders vary by price control, time duration, and discretion.
Core Order Types
| Order Type | How It Works | Execution | Key Risk |
|---|---|---|---|
| Market order | Buy or sell immediately at the best available price | Immediate; fills as soon as it reaches the market | Price uncertainty: you get speed but no price control |
| Limit order | Buy or sell only at a specified price or better | Only when the market reaches the limit price (or better) | May never execute if the price is not reached |
| Stop order (stop-loss) | Becomes a market order once a specified stop price is triggered | After the stop price is hit, executes at the next available price | Execution price may differ significantly from the stop price |
| Stop-limit order | Becomes a limit order once the stop price is triggered | After the stop price is hit, only at the limit price or better | May not execute at all if the price moves past the limit |
Think of it this way:
- Market order = "Execute now, whatever the price"
- Limit order = "Execute only at my price or better"
- Stop order = "If the price hits X, execute at the market"
- Stop-limit order = "If the price hits X, execute only at Y or better"
Where to Set Limit and Stop Prices
This is one of the most commonly tested concepts. The placement of the trigger price depends on whether you are buying or selling:
| Order | Placement Relative to Current Market Price | Why |
|---|---|---|
| Buy limit | Below current market price | You want to buy at a lower price |
| Sell limit | Above current market price | You want to sell at a higher price |
| Buy stop | Above current market price | Triggers a buy if the price rises (used by short sellers to limit losses) |
| Sell stop | Below current market price | Triggers a sell if the price falls (classic stop-loss protection) |
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 market. A stop-limit order adds price protection but risks not executing at all.
- Buy limits go below the market; sell limits go above. Students often reverse this. Think: you want to buy cheaper (below) and sell higher (above).
Time-in-Force Designations
Every order has a duration: how long it stays active if not executed.
| Designation | Meaning | Partial Fills? |
|---|---|---|
| Day order | Expires at the end of the trading day if not executed (this is the default) | Yes |
| Good-til-canceled (GTC) | Remains open until executed or canceled by the customer | Yes |
| Immediate-or-cancel (IOC) | Must execute immediately; any unfilled portion is canceled | Yes (partial fills allowed) |
| Fill-or-kill (FOK) | Must execute in its entirety immediately or the entire order is canceled | No (all or nothing, right now) |
| All-or-none (AON) | Must execute in its entirety, but does NOT need to fill immediately | No (all or nothing, but can wait) |
The key distinctions:
- IOC vs. FOK: Both require immediate action, but IOC allows partial fills while FOK does not
- FOK vs. AON: Both require the full quantity, but FOK must fill immediately while AON can wait for liquidity
- Day order: The default if no time-in-force is specified
Exam Tip: Gotchas
- If no time-in-force is specified, the order is a day order by default. It expires at the close of trading that day.
- FOK and AON both require full fills, but only FOK must be immediate. AON can wait for liquidity to accumulate.