Why Your Order Type Matters

A stock doesn’t have one single price at any given moment. It has a bid, which is the highest price a buyer is currently willing to pay, and an ask, which is the lowest price a seller is currently willing to accept.

The gap between bid and ask is called the spread, and for a big, heavily traded stock, it’s often just a penny. For a thinly traded small company, however, it can be a lot  wider.

The price you see on a quote screen is usually the last completed trade, which may not be the price you actually get, especially when the market is moving fast.

Choosing the right order type is how you control the gap between the price you expect and the price you receive.

The Main Stock Order Types

Market Order

A market order tells your broker to buy or sell immediately at the best price available at that moment. It will almost always fill during regular trading hours, but the final price isn't guaranteed.

Limit Order

A limit order sets the most you’ll pay when buying or the least you’ll accept when selling. Your price is protected, but if the stock never reaches your limit, the order doesn’t fill.

Stop Order

A stop order, often called a stop-loss order, sits inactive until the stock hits a price you choose, called the stop price. It then turns into a market order. Investors typically place a sell stop below the current price to limit their loss if a stock they own starts falling.

A stop-limit order also waits for a stop price, but once triggered it becomes a limit order instead of a market order. That can keep you from selling far below your target price, at the cost of possibly not selling at all.

A trailing stop order sets your stop price at a fixed dollar amount or percentage below the stock's current price, and the stop moves up automatically as the stock rises.

If the stock then drops by that amount from its highest price since the order was placed, the order triggers.  This lets you protect gains without constantly adjusting your stop manually.

Seeing the Difference With One Stock

Imagine a stock trades at $50 a share, and you want to buy 20 shares, or $1,000 worth. With a market order, you buy almost instantly at the best available price, which might be $50.02, for a total of $1,000.40.

With a limit order at $48, nothing happens unless the price drops to $48 or lower. In that case, you pay no more than $960. If the stock climbs to $55 instead, your limit order never fills, and you miss the move entirely.

Now say you already own those 20 shares at $50 and set a sell stop at $45 to protect yourself. If the price falls to $45, your stop triggers a market order and you may sell near that level, limiting your loss to roughly $100.

With a 10% trailing stop, if the stock first rises to $60, your stop rises with it to $54. If the stock then falls to $54, the order triggers, potentially leaving you with a profit of about $4 a share.

Does a Stop-Loss Order Guarantee Your Sale Price?

The stop price is a trigger, not a promise. The Securities and Exchange Commission warns that the price you actually receive can differ significantly from your stop price once the order becomes a market order.

This matters most when a stock opens the trading day well below where it closed the day before. This often happens after bad news is released overnight.

If your $50 stock has a $45 stop, and it opens at $38 after a disappointing earnings report, your order triggers and may sell at around $38, not $45.

A stop-limit order at $45 would not sell below $45, but in that same scenario you’d still own the shares at $38 with no sale at all.

Neither choice is necessarily better. One prioritizes the exit and the other prioritizes the price.

How Long Does an Order Stay Open?

Every order also can also carry a time instruction that tells your broker how long to keep trying to fill it.

Day Order

A day order expires automatically if it hasn't been filled by the end of that day's trading session. Most brokerages use it as the default setting.

Good-Til-Canceled Order

A good-til-cancelled order, or GTC, stays active across multiple days until it fills or you cancel it. Brokers usually cancel GTC orders automatically after a set period, usually several months. Check your broker's limit before relying on one.

Which Order Type Should a Beginner Use?

For most first-time investors buying a large, heavily traded stock, a market order during regular hours is straightforward because the spread is usually small. Major U.S. exchanges have trading hours from 9:30 a.m. to 4 p.m. ET.

A limit order may be better when you’re buying a smaller company, trading on a volatile day, or placing an order outside regular hours. Setting your buy limit a few cents above the current ask gives a good chance of getting filled quickly while setting a maximum price you’ll pay.

Be careful about placing market orders while the market is closed. With some brokers they execute at the next open, and the price may have moved sharply overnight.