Market Orders and Limit Orders
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sell limit
Profit is taken using a “sell limit” order – once the price is reached, the specified number of shares are sold.
Definition of sell “limit order“; An order to a broker to sell a specified quantity of a security at or above a specified price (called the limit price).
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stop loss
Capital is protected using a “stop loss” order – when the stop price is reached, all the shares are sold.
Definition of “stop-loss”; A stop order for which the specified price is below the current market price and the order is to sell.
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Market Orders and their Risks
Your market order is executed at the best price obtainable in available markets at the time the order is executed. Please note and remember that the price at which your order is finally executed could well be different from the quoted price you got for yourself before you placed your order. Again, the reason is that the market is dynamic. Prices are changing continuously in the market as the minutes and seconds go by. Orders are executed in accordance with prescribed priority rules, delays in execution can occur due to market demand of a security, and in the meantime market price can change as a result of investor demand and other factors. Market orders guarantee an execution (subject to the availability or the liquidity of the security) but they do not guarantee an execution at a specific price. Large orders can take longer to fill and can move the market for the stock, sometimes to your disadvantage.
Limit Orders
In contrast to the market order, there is another type of order called a “limit order” that does in fact guarantee a price but not an execution. Limit orders are so named because you place a limit on the amount you are willing to pay to buy a stock or on the amount you are willing to accept to sell a stock. Naturally, you will accept more favorable prices if you can get them. Here’s how limit orders work using Disney as an example.
Buy Limit Order
DIS is selling for $84 a share. Based on your experience, you think the stock could decline in the short-term and then rebound strongly upward. So you place a limit order GTC (Good Till Canceled) to buy DIS at $81. (Any price different from the current market price is said to be “away from the market.” Limit orders are always placed away from the market - below when you buy and above when you sell.) Now the broker/dealer’s computers monitor your order and when the stock price hits $81 your limit order is executed. If the stock price does not decline to $81, your limit order is not executed. Execution is always subject to the availability or the liquidity of the security.
Sell Limit Order
You own Disney which is trading at $84. You think the stock can still go higher. So you place a sell limit order at $88. When the stock price rises to $88, your limit order is executed. If the stock price does not rise to $88, your limit order is not executed. Execution is always subject to the availability or the liquidity of the security.
Risks of Limit Orders
Limit orders give you more control over execution price, but control also comes with certain limitations that you should be aware of: i.e. you may miss owning or selling stock, depending on the circumstances. The stock may never reach your limit price and your limit order will not execute. For example, in the Sell Limit Order example above, if Disney only reached $87 and then started to fall, your limit order would not have executed and you’d still own the stock as its price drops.
Fail to execute. Even if your stock reaches or passes through the limit price, your limit order may not execute if there are orders ahead of yours at the same limit price. The orders in line ahead of you must be filled first and there may not be enough stock available to fill your order when its turn comes.
Stop Orders
Stop orders are mainly used to limit loss on profitable long or short positions which is why they’re also called “stop loss” orders. Although they resemble limit orders, stop orders have one feature in particular that sets them apart. Unlike a limit order which can be filled only at a specific limit price, when a stop order reaches its stop price, the stop order then becomes a market order to be executed at the best price available at the time of execution. As a result, there are trading situations where the stop order could end up getting executed at a price that is significantly higher or lower than the stop price and potentially unfavorable to the investor. Stop orders are not allowed on OTC Bulletin Board or Pink Sheet stocks.
Buy Stop Order
The buy stop is frequently used to protect the profits of a successful short sale. Let’s say you shorted Disney at $89 and the stock subsequently dropped to $82. Concerned that the stock could start going up, you place a buy stop order at $83 to cover your short position and protect your profits. The stop order becomes a market order when the stock trades one board lot or more at $83.
Sell Stop Order
You bought Disney at $80 and it’s gone to $89. You think it’s headed down so you place a sell stop order at $88 to protect most of your profit. If the stock hits $88, your sell stop order will be triggered and become a market order. At that point, your order is then eligible for execution at market, and the price you obtain could be lower than $88, depending on the price available at the time your order is executed.
Stop Limit Order
The stop limit order can be used to buy or sell. The stop limit order is a regular stop order that becomes a limit order rather than a market order when the order is triggered. With the stop limit order, an investor is trying to be even more precise about what price is acceptable. In the E*TRADE Canada system you must place your stop and your limit at the same price. Thus, a sell stop limit order in the sell limit example for Disney above would be placed as “sell Disney at 88 stop, 88 limit” meaning: “I want out at 88 and not less than 88″.
Since it is a limit order, there is no guarantee that the order will be filled.
