25 July 2020

What Are Market Orders, Limit Orders, And Stop Orders?

No matter the type of asset you plan on trading, from cryptocurrency to stocks to CFDs, you should have a firm understanding of the various types of orders. Each order type serves a different purpose, so knowing how to use each type properly will allow you to trade in a range of situations.

What Are Market Orders?

Market orders are orders that let you immediately buy or sell a chosen asset. If you opt for a market order, you know that it will be executed at the available market price.

In most cases, market orders are executed either incredibly close or right at the bid or ask price for sell and buy orders. The key here is “most cases.” If the market conditions change before the order is placed, so will the price it is executed at. This is particularly important to keep in mind in volatile markets like cryptocurrency, as the market price can change drastically in a short time.

What Are Limit Orders?

Limit orders allow you to buy or sell an instrument as long as it is at the price you specify, or better. Buy limit orders are executed at either your specified limit price or lower while sell limit orders are executed at your specified limit price or higher.

Limit orders let you only buy or sell an instrument if it reaches a price that you are willing to do so, providing an element of risk management. At the same time, if the price never reaches the threshold you specify, the order will not be executed.

What Are Stop Orders?

Stop orders are also called stop-loss orders. These orders let you buy or sell the instrument once the price reaches the price that you indicate, which is called the stop price. Once the market reaches the stop price, your stop order turns into a market order.

Because of the nature of stop orders, you have a lower risk of a partial fill for the order or a no-fill order. However, you need to keep in mind that because stop orders become market orders, they are subject to the same price changes in volatile markets as market orders.

Other Important Things To Know

In addition to the basic definitions of market orders, limit orders, and stop orders, there are a few more subtleties you should know about.

VISIBILITY

If you compare limit orders and stop orders, you will find that the market can view the limit orders but not the stop orders. Limit orders tell your broker when to fill your order, so they are visible. By contrast, stop orders are not visible, and they just activate when your specified price is met.

PRICE AT FILLING

Although it was already mentioned, it is worth repeating that market orders and stop orders will not necessarily be filled at the price you expect. Remember that stop orders become market orders when they reach the stop price. At this point, if the market price changes before your order is filled, you may end up with a worse price than anticipated.

You can minimize the risk of market and stop orders being filled at unexpected rates by choosing a broker with faster execution times. The shorter the time, the less chance the market has to change dramatically.

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