4 Different Stock Market Order Types: What You Need To Know

Ever placed a stock market trade and wondered if there was a more strategic way to do it?

Most beginner investors only know one way to buy and sell stocks – hit the buy/sell button.  But behind that simple action lies a world of order types that give you more control, precision and protection when buying or selling. 

This is the fourth article in our Introduction to Stock Market Investing series, explaining the different types of stock market orders.

What Are Stock Market Orders?

When you place a trade, you’re not just saying ‘buy’ or ‘sell’ – you’re giving your broker instructions on how you want the trade to happen. These instructions are called stock market order types. They tell your broker things like the maximum price you’re willing to pay, the minimum price you’re willing to sell for, and how quickly you want the transaction to occur.

Different order types have different purposes. Some help you buy and sell more strategically and avoid overpaying or underselling, whilst others set up automatic exits when things go south and minimise your need to watch markets consistently.

Knowing the different order types lets you make buy and sell decisions based on your criteria.

Why Understanding Order Types Matters

Order types are the control levers of investing. Here’s how:

• They impact the price you buy at or sell for
• They influence when and if your order is executed (filled)
• They help you limit investment losses or lock in profits

Understanding order types can make investing easier through automation.

The Two Main Categories – Market vs Limit

Every buy or sell transaction is built on two foundational order types: Market and Limit Orders. Understanding how they work is essential.

Market Orders: Fast But Less Controlled

A market order tells your broker:

“Buy or sell this stock right now at the best available price.”

It prioritises speed over price. Once placed, a market order is executed immediately, matching you with the next available buyer or seller in the stock market. They are often the default option and the most used order type on investment platforms.

Market orders are best for buying and selling stocks in stable markets and when immediate execution is the primary objective. They are also used by long-term investors who are less worried about short-term price movements.

Some downsides of market orders include:

• Slippage: Sudden price movements between when you place an order and when it is executed can cause you to pay more or receive less than expected.
• Lack of Control: You have no say in the final execution price – it will be whatever the market offers at the time of order.

How Market Orders Work

Say you want to buy 10 shares of Example Industries.

• The market price of each share is £100
• When you submit a market order, that order fills at £100 (or whatever the current best price is at that moment)
• If your order is filled at £101, that extra £1 is the slippage.

Limit Orders: More Control But Less Certain

A limit order tells your broker:

“Only buy or sell this stock at this specific price or better. Don’t fill the order unless my conditions are met.”

It prioritises price control over speed, but comes with some uncertainty: if the stock’s price doesn’t reach your set price, the order won’t be executed. 

Because limit orders only execute when specific criteria are met, they are best for buying a dip in stock prices without overpaying, selling stock at a target price, and avoiding emotional decisions in volatile and fast-moving markets.

Some downsides of limit orders include:

• Unfilled Orders: The stock may never reach your buy or sell price, so your order may never be executed (mentioned earlier).
• Missed Opportunities: In fast-moving markets, limit orders might not keep up with price swings and volatility.

How Limit Orders Work

Say Example Industries is trading at £130, but you think it’s only worth buying at £125:

• You set a limit buy order at £125, and your order sits in your broker’s order book.
• Your limit order will be filled when the company’s stock hits £125 or lower.
• If the stock never hits £125, your order remains open until you cancel it or it expires.

To summarise both order types, here’s a comparison table.

Beyond The Basics – Stops & Stop-Limits

Meet the next layer of stock order types: Stop Orders and Stop-Limit Orders. These are especially useful for managing risk and locking in profits, two things investors care about most.

What Is A Stop Order?

A stop order (or stop-loss order) is an order to buy or sell a stock once it reaches a specific trigger price, the stop price. Once the stop price is hit, the order turns into a market order and executes at the next available price.

Stop orders are best for protecting gains or limiting losses, creating an exit strategy, and for anyone who doesn’t want to monitor the markets consistently.

Some downsides of stop orders include:

• Slippage: Explained earlier.
• Whipsaw Effect: Prices might briefly dip to your stop price, trigger the sell, then bounce back, causing you to sell unnecessarily.

How Stop Orders Work

Say you own shares of Example Industries trading at £200, but you want to protect yourself from a potential drop.

• You set a stop sell order at £180, which sits on your broker’s order book.
• If the price falls to £180, your stop order is triggered and becomes a market order, selling your shares at the next best price, whether that’s £180, £179, or lower.
• If the price falls to £180, triggers the sell, then bounces back to £200, that is the whipsaw effect.

What Is A Stop-Limit Order?

A stop-limit order is a ‘smarter’ version of the stop order. It adds a limit price to your stop condition. Once the stop price is hit, instead of becoming a market order, it becomes a limit order, giving you more control over the execution price.

Stop-limit orders are best for limiting slippage when guarding against stock price declines. They also offer more precision in volatile markets, aiding in risk management and price control.

Some downsides of stop-limit orders include:

• No Execution: If the stock price moves past your limit order too quickly, your order might not be filled, exposing you to more loss.
• Complexity: Requires you to understand and set two prices: a stop price and a limit price.

How Stop-Limit Orders Work

Say Example Industries’ stock is trading at £250 and you want to sell if it drops, but not for too low a price.

• You set a stop-limit sell order:
  • Stop Price: £240 (the trigger point)
  • Limit Price: £238 (the lowest you’re willing to sell for)
• If the price falls to £240, the order is triggered, but will only be executed at £238 or better.
• If Example Industries’ stock crashes to £235 quickly, the order might not fill.

To summarise, here’s a comparison table.

Real-Life Scenarios to Bring It All Together

Let’s walk through some investor scenarios and examples of the different order types in action.

Scenario 1: Long-Term Investor Buying Into A Company

You’re buying Example Industries’ shares for the first time, and your buy price is £100 (current price £101)

• Use a market order for immediate execution.

Scenario 2: Long-Term Investor Buying The Dip

You believe Example Industries is worth buying if the stock drops to £150 (currently at £170).

• Use a limit order at £150 so you don’t have to watch the markets daily.

Scenario 3: Protecting Profits

You bought Example Industries’ shares at £300 (now at £400).

• Set a stop order at £385 to lock in gains if the shares begin declining.

Scenario 4: Exiting During A Crash

Example Industries becomes volatile and the stock starts falling.

• A stop order may execute too low.
• A stop-limit may offer more price protection, but risks not being filled.

Rounding It All Up!

Order types are tools that provide either convenience or control. Market orders allow for speed, and limit orders are used when price control is your priority. Stop and stop-limit orders help protect gains and manage risk.

Whether buying your first shares or managing a portfolio, knowing how and when to use each type puts you in charge.