Varieties of share market orders

To help traders achieve the best returns in the share market, several types of orders are offered by online trading platforms. These are the most common.

Market orders purchase (or short sell) the security at the going market rate, e.g., the price quoted by the charting platforms at the moment the order is placed. If an online trading platform offers “click and deal” trading, it’s most likely a market order, which is designed to open the position, long or short, as quickly as possible, sacrificing money on the trade if necessary.

Limit orders enter the position at a predetermined or better price. If a stock is currently range-trading between 3.00 and 5.00 but the trader believes it’s likely to break above that level, he could merely enter the market long and hold the position in anticipation of the break. But by doing so, he’d tie up his capital and forego other, equally profitable trading opportunities.

Instead, he could enter a limit order to purchase the stock should the price touch 5.25, a sufficient distance above the resistance level to preclude triggering by all but the worst spikes through. In this manner, the position is only opened as the rally begins, not before. As well, there’s no risk of buying if the stock winds up breaking beneath support, as the limit order would not be triggered.

Note that limit orders can be filled at a better price, e.g., a lower price for a buy order or a higher one for a short sell. Once the above long limit order is triggered, it may be filled at 5.25 or at a price somewhere below that level.

Stop orders are similar to limit orders in that the trader presets his entry price. However, when that price is reached a stop order becomes a market order, and will be filled at the next available price, rather than the next available better price.

If the above example was not a limit order but a buy stop order (as opposed to a sell stop order), it would still be triggered at 5.25. But if the price then gapped higher and the next price recorded was 6.25, that’s the price at which the order would be filled (if the trade could be entered even then). The trader wouldn’t receive as good a price as desired. However, the position would nevertheless be open, which would not have been the case if the price gapped for a limit order.

Stop limit orders attempt to provide the best of stop orders and limit orders. Once the stock hits the trigger price, a stop limit order becomes a limit order rather than a market order. The order will be filled only at the trigger price or better, rather than the next available price.

It’s important to utilise the most appropriate type of order for the trading circumstances, based upon the trader’s desire to enter the position, which hopefully is based upon the profit potential.