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Investment orders, including market orders, limit orders and stop orders, can be used to buy and sell stocks, exchange-traded funds (ETFs), currencies, futures and other assets.
While market orders are the most common and straightforward way to make a trade, understanding how each type of order works can allow you to be more strategic with your trades.
What Is an Investment Order?
When you want to buy or sell a stock, ETF or other types of investment securities, you'll initiate an order with your brokerage firm. The type of order you choose instructs the broker on how (and when) to complete the transaction.
When buying a security, there usually needs to be a seller willing to accept your price. The same goes for selling a security—you need a buyer willing to pay your price.
With stocks and ETFs on a major stock exchange, this generally isn't an issue. Orders typically complete quickly once the requirements for your order are met. With penny stocks and other securities that don't have a high trading volume, however, it can take hours, days or even weeks to find a buyer or seller to accept your price.
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A market order is the most basic investment order you can make. When you place a market order, you instruct the broker to buy or sell the security at the best price currently available on the market.
This ensures that the transaction gets completed as quickly as possible, but it doesn't guarantee it will be completed at a specific price.
When to Use a Market Order
It's best to use a market order when the market is open, and when you want to complete the trade as quickly as possible. If you place a market order after the market closes, it'll be executed when trading opens the following business day, which could result in a higher or lower price than you're expecting.
A limit order instructs the brokerage firm to buy or sell a security with a set price limit. If you're buying, for instance, you'll set a maximum price you're willing to pay for the security. If you're selling, you'll set a minimum price you're willing to accept from a buyer.
Keep in mind that your limit order may never be completed if the security doesn't reach your desired price. Even if it does, your order may not be executed if there are others ahead of yours, if the price changes before the broker completes your order or there aren't enough sellers left willing to sell at that price.
Depending on the broker, you can set a limit order to expire at the end of the current regular trading session, at the end of extended trading hours for the day or until you cancel it (though "good until canceled" orders typically expire after 30 to 180 days).
When to Use a Limit Order
You may consider a limit order if you believe that you can buy a security at a lower price—or sell it at a higher price—than what it's currently trading at.
For example, if a stock is selling at $120 per share, but you think that's too high, you could place a buy limit order for $115 per share. If the stock price dips to that threshold or below it, the broker will execute your trade. Alternatively, if you own the stock but don't want to sell until it reaches $125 per share, you could place a sell limit order for that price.
A stop order instructs the broker to buy or sell a security at the market price once the security trades at your stop price. In other words, once the security reaches a certain price, your order becomes a market order and executes immediately. This is in contrast to a limit order, which sets a hard maximum or minimum price you're willing to accept.
If the security never reaches the stop price, the trade won't be executed. Like limit orders, brokers typically allow you to choose how long to keep your stop order active. Note, however, that if the price of the security is moving quickly, a stop order cannot guarantee a trade at or even near your stop price.
When to Use a Stop Order
Stop orders can be beneficial for investors who are looking to minimize a loss, protect an unrealized gain or get in on an investment you think has a lot of potential.
For example, if you bought a stock at $120 per share, and the price has risen to $145 per share, you could place a stop order—also called a stop-loss order—to sell it at $142 per share. With this approach, you'll still benefit if the stock price continues to rise, but if the price drops below $142, you'll avoid losing more of your unrealized gain.
On the flip side, let's say you have your eye on a stock that's selling at $120 per share, and you believe that if the price breaks $122, it's likely to continue to rise. In this instance, you could place a stop-buy order at $122, allowing you to get in before it gets away from you.
Other Investment Options
Investment orders are limited to a specific set of securities, including stocks, ETFs, currencies, futures, commodities, bonds and other assets. If you want to diversify your portfolio, however, you may also consider the following options:
If you're unsure about where to invest your money or you'd like some expert guidance, consider consulting with a financial advisor.
The Bottom Line
If you're not strictly buying and holding your investments, the different types of investment orders can help you gain a little more control over your trading. Understanding how they work can help you develop a strategy with your trades to potentially increase your gains and minimize your losses.
Remember, though, that trying to time the market is often a mistake and can result in greater losses, especially if you're not an experienced investor. If you want to learn how to use different investment orders for your portfolio, start small. And if you feel like you need some assistance, take steps to find a good financial advisor who can help you accomplish your goals.