What Is an Order?
An order consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor's behalf. An order is the fundamental trading unit of a securities market. Orders are typically placed over the phone or online through a trading platform, although orders may increasingly be placed through automated trading systems and algorithms. When an order is placed, it follows a process of order execution.
Orders broadly fall into different categories. This allows investors to place restrictions on their orders affecting the price and time at which the order can be executed. These conditional order instructions can dictate factors such as a particular price level (limit) at which the order must be executed, for how long the order can remain in force, or whether an order is triggered or canceled based on another order.
Key Takeaways
- An order is a set of instructions to a broker to buy or sell an asset on a trader's behalf.
- There are multiple order types, which will affect at what price the investor buys or sells, when they will buy or sell, or whether their order will be filled or not.
- Which order type to use depends on the trader's outlook for the asset, whether they want to get in and out quickly, and/or how concerned they are about the price they get.
Understanding Orders
Investors utilize a broker to buy or sell an asset using an order type of their choosing. When an investor has decided to buy or sell an asset, they initiate an order. The order provides the broker with instructions on how to proceed.
Orders are used to buy and sell stocks, currencies, futures, commodities, options, bonds, and other assets.
Generally, exchanges trade securities through a bid/ask process. This means that to sell, there must be a buyer willing to pay the selling price. To buy there must be a seller willing to sell at the buyer's price. Unless a buyer and seller come together at the same price, no transaction occurs.
The bid is the highest advertised price someone will pay for an asset, and the ask is the lowest advertised price at which someone is willing to sell an asset. The bid and ask are constantly changing, as each bid and offer represents an order. As orders are filled, these levels will change. For example, if there is a bid at 25.25 and another at 25.26 when all the orders at 25.26 have been filled, the next highest bid is 25.25.
This bid/ask process is important to keep in mind when placing an order because the type of order selected will impact the price at which the trade is filled, when it will be filled, or whether it will be filled at all.
Order Types
On most markets, orders are accepted from both individual and institutional investors. Most individuals trade through broker-dealers, which require them to place one of many order types when making a trade. Markets facilitate different order types that provide for some investing discretion when planning a trade.
Order types can greatly affect the results of a trade. When trying to buy, for example, placing a buy limit at a lower price than what the asset is currently trading at may give the trader a better price if the asset drops in value (compared to buying now). But putting it too low may mean the price never reaches the limit order, and the trader may miss out if the price moves higher.
Market Order
A market order instructs the brokerage to complete the order at the best available price. Market orders are generally always executed unless there is no trading liquidity.
Limit Order
Alimit orderis an order tobuyor sell a stock at aspecific priceor better. Limit orders ensure that a buyer pays only a specific price to purchase a security. Limit orders can remain in effect until they are executed, expire, or are canceled.
Limit Sell Order
A limit sell order instructs the broker to sell the asset at a price that is above the current price. For long positions, this order type is used to take profits when the price has moved higher after buying.
Stop Order
A stop order instructs the brokerage to sell if an asset reaches a specified price below the current price. A stop order can be a market order, meaning it takes any price when triggered, or it can be a stop-limit order wherein it can only execute within a certain price range (limit) after being triggered.
Buy Stop Order
A buy stop order instructs the broker to buy an asset when it reaches a specified price above the current price.
Day Order
A day order specifies the timeframe of the order rather than the type of order. A day order must be executed during the same trading day that the order is placed.
GTC Order
A good-'til-canceled (GTC) order also indicates the timeframe in which the trade must be executed. This type of order remains in effect until it is filled or canceled.
If an order is not a day order or a good-'til-canceled order, the trader typically sets an expiry for the order.
Immediate-or-Cancel Order
Immediate-or-cancel (IOC) means that the order only remains active for a very short period of time. This could be as short as several seconds. If the order is not executed in that time, it expires.
All-or-None Order
An all-or-none (AON) order specifies that the entire size of the order be filled. Partial fills will not be accepted. If the whole order is not filled, it is not completed at all.
Fill-or-Kill Order
A fill-or-kill (FOK) order must be completed immediately and completely or not at all. It combines an all-or-none order with an immediate-or-cancel order.
One order type isn't better or worse than another. Each order type serves a distinct purpose. The correct order to use depends on the trader's goals and tolerance for risk.
Example of Using an Order for a Stock Trade
When buying a stock, a trader should consider how they will get in and how they will get out at both a profit and loss. This means there are potentially three orders they can place at the outset of a trade: one to get in, a second to control risk if the price doesn't move as expected (referred to as a stop-loss), and another to eventually trade profit if the price does move in the expected direction (called a profit target).
A trader or investor doesn't need to place their exit orders at the same time they enter a trade, but they still should be aware of how they will get out (whether with a profit or loss) and what order types they will use to do it.
Assume a trader wants to buy a stock. Here is one possible configuration they could use for placing their orders to enter the trade as well as control risk and take profit.
They watch a technical indicator for a trade signal and then place a market order to buy the stock at $124.15. The order fills at $124.17. The difference between the market order price and the fill price is called slippage.
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They decide that they don't want to risk more than 7% on the stock, so they place a sell stop order 7% below their entry at $115.48. This is the loss control, or stop-loss.
Based on their analysis, they believe they can expect a 21% profit from the trade, which means they expect to make three times their risk. That's a favorable risk/reward ratio. Therefore, they place a sell limit order 21% above their entry price at $150.25. This is their profit target.
One of the sell orders will be reached first, closing out the trade. In this case, if the price reaches the sell limit first, it results in a 21% profit for the trader.
What's the Difference Between a Limit Order and a Market Order?
A limit order sets the highest price at which an investor will buy an asset and the lowest price at which they are willing to sell. This is intended to maximize profits and minimize losses. A market order is more open-ended and instructs the broker to complete the trade at the best available price.
Is a Batch Order the Same As a Market Order?
A batch order is not the same as a market order, but it is made up of multiple market orders. These orders are sent between the close of one day's session and the start of the next. A batch order is placed by a brokerage, combining multiple orders for the same stock as if they were one single transaction. This type of order is only executed for orders placed between trading sessions and happens at the opening of the market for the day.
Why Do Traders Place Orders?
Orders allow traders to enter or exit a trade at a specific price and during a set timeframe. Trading orders are used to maximize profits and limit losses. They can also allow traders to take advantage of sudden or unexpected price movements.
The Bottom Line
An order is an instruction given to a broker to buy or sell an asset on behalf of a trader. The different types of orders allow investors to specify the price at which they buy or sell, when the trade occurs, and whether it will be fulfilled or canceled if certain conditions aren't met.
Traders place orders depending on how they predict the asset will move, what level of profit they want to make, and how quickly they want the trade executed. A trader can place multiple types of orders at once to protect their profit and minimize the risk of loss on a trade.
