Advanced — What Are The Different Types Of Stock Market Orders?

A simple graph showing how a market order works (via ig.com)

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The stock market has long been a highly profitable venture for those who understand it. However, it can also pose significant risk when investors make impulsive decisions. Therefore, adequate knowledge is essential for sustainable gains. This article explores the various types of market transactions and what they mean. Understanding these helps investors make informed decisions to maximize their profit. 

What is the Stock Market? 

The stock market is a system in which shares—small ownership pieces of public companies—are bought and sold. A company consists of thousands, millions, or even billions of these shares, and their value typically increases when the company performs well. Investors aim to buy stocks at a lower price and sell them at a higher one to generate positive returns. The terms “stocks” and “shares” are often used interchangeably.

The stock market can be accessed through stockbrokers, primarily online. Common platforms include Fidelity, Charles Schwab, and Robinhood. These brokers serve as intermediaries that allow users to buy and sell stocks. They may take a portion of the profits an investor earns or charge a subscription fee.

The Types of Stock Market Orders

There are two basic types of stock transactions: buying and selling. However, there are many different “orders” that investors can execute to buy or sell. Each one serves a different strategy and purpose, and knowing them can help an investor increase profitability. Keep in mind that the availability and naming of these orders may vary between trading platforms. 

When buying, investors can decide to use a market order, limit order, stop order, or stop-limit order. Here is what each of those actually mean:

1. Market Order: A market order is a straightforward buy. If a stock is priced at $5, placing a market order purchases it at that price, and you now own that share. 

2. Limit Order: A limit order buy allows you to set a maximum purchase price. If a stock is currently at $10, and you place a limit order at $5, the stock will only be purchased if it drops to $5 or lower. This is useful when you expect the stock to dip and prefer not to monitor the price constantly. 

3. Stop Order: A stop order executes a buy when the stock rises to a set price. Though it may seem counterintuitive to buy as prices rise, this method helps investors catch upward trends early and potentially sell at a higher price later. 

4. Stop-Limit Order: This combines features of both stop and limit orders. When the stock reaches the stop price, it triggers a limit order. For instance, if the stop is $10 and the limit is $15, a stock priced at $5 won’t be bought immediately. Once it rises to $10, the stop activates, and the stock is bought as long as it's within the $10–$15 range. It essentially allows buying within a defined price window. 

When selling, investors have access to the same four options they did when buying: market order, limit order, stop order, and stop-limit order. However, they are slightly different in the context of selling:

1. Market Order: Similar to its buying counterpart, a sell market order sells shares at the current market price and transfers the funds to the investor. 

2. Limit Order: This order sells the stock at the specified price or higher. For example, if the limit is set at $10 and the stock rises from $5 to $11, the system sells at the next available price above $10. This is ideal for capturing gains automatically. 

3. Stop Order: This type of order sells the stock once its price falls to a certain stop value. It’s a helpful way to minimize losses. For instance, if the stock is at $20 and you place a stop at $15, the system sells if the stock drops to $15, helping you avoid further decline. Without this, the price might drop to $5 before you notice—too late to prevent steep losses. 

4. Stop-Limit Order: Like the buying version, this order executes a sale within a specified range. For example, if the current stock price is $20, and you set a stop at $15 and a limit at $10, the stock is sold if the price falls within that range. If it falls too fast to $5, the order won’t execute, which can be helpful if you believe the price might recover and prefer not to sell at such a low point. 

Conclusion

Understanding these core transaction types is crucial for beginner investors. While more complex orders and combinations exist, effective use often requires additional experience and practice. By learning the basics, traders can start their investment journey with more confidence and control.