Market, limit and stop orders: What they are and when to use them

Placing a stock market order to buy or sell a stock involves a few key steps, one of which is choosing an order type. The order type determines when and why an order goes through. For example, one type of order can help you put a trade through immediately, while another triggers a trade if a stock hits a certain price.

To help you decide on the right order for each of your trades, here's a breakdown of the three main types to become familiar with: market, limit and stop orders.

What is a market order in stock trading?

A market order allows you to buy or sell a stock as soon as possible. Once placed, the trade is immediately queued for execution. However, the stock price may fluctuate after the market order is placed and before it’s executed.

For example, if you place a market order to purchase 10 shares of a stock trading at $50 per share, a fast-moving market could cause the order to be filled at a higher or lower price, such as $49 or $51 per share.

How to make a market order

To place a market order, you can contact your broker to specify the order type you want to make or you can log in to a self-directed investing account and select “market order” as your order type. With either option you’ll need to specify the trade details, including the stock’s name and the number of shares you want to trade or the dollar amount you want to trade.

What is a limit order in stock trading?

A limit order allows you to arrange for a trade to be placed when a stock hits a certain price. However, this type of order will only go through if the stock price remains at the limit price or better (lower for buyers, higher for sellers) through the time of execution.

For example, if you set a limit order to buy 10 shares of a stock when it hits $50 per share, the trade will be triggered when the stock price hits $50. Whether it goes through or not, however, depends on what happens next. If the stock price is at $50 or less per share when it’s time to execute the trade, it will go through. If it’s at $50.01 or more, it will not.

What’s the difference between a buy-limit order and a sell-limit order?

A buy-limit order is a type of limit order used for purchasing stocks. For example, suppose there’s a stock you’re interested in buying that’s trading at $35 per share. If you want to buy 10 shares of the stock for no more than $30 per share, you could place a buy-limit order at $30. Your order will then be executed only if the stock price hits $30 or less.

A sell-limit order is a type of limit order used for selling stocks. For example, if you want to sell 10 shares of that same stock for no less than $40, you could place a sell-limit order at $40. Your stock would then be executed only if the stock price hit $40 or more.

How to make a limit order

To initiate a limit order, you can contact your broker or log in to a self-directed investing platform. The order process involves deciding on the stock you want to trade and specifying the number of shares you want to buy or sell. Additionally, you’ll need to set your price and time limits – e.g., a day, until further notice, etc.

What is a stop order in stock trading?

A stop order, also known as a stop-loss order, is an order to buy or sell a stock when a certain price is reached. Once triggered, the stop order transitions into a market order and is executed at the next available price, which may be better or worse than the stop price. While similar to a limit order, it doesn’t offer the same price protection.

How are stop-loss orders and stop-limit orders different?

Stop-loss and stop-limit orders both involve trading stocks once they hit certain prices. However, stop-limit orders are executed as limit orders, while stop-loss orders are executed as market orders.

That difference is significant because market orders guarantee execution once the limit is hit, even if it means getting a lower price. Limit orders, on the other hand, only execute if the final price is the limit price or better.

Stop-limit orders also involve setting a stop price and limit price, which don’t have to be the same. For example, when selling stock, you could set a stop price at $50 and a limit price at $45. The sale would then be triggered when the stop price hit $50, but the stock could sell for as low as $45.

How to make a stop order

Similar to the other order types, you can make a stop order by contacting your broker or going through a self-directed investing platform. To place the order, you’ll need to select the stop order trade type, the stock you want to trade, the number of shares and your desired timeline.

Market versus limit versus stop orders: When to potentially use them as you trade stocks

Now that you know how the three main types of stock market orders work, here’s when it can make sense to use each one.

Market orders

Market orders can be useful when you're looking to enter or exit a position quickly due to an urgent need or a fast-moving opportunity. For example, if a stock price dips drastically and you expect it might spike soon, you could use a market order to quickly purchase shares on the dip. The other order types involve planning for future fluctuations and waiting for triggers, which aren’t ideal when you want to make trades right away.

Limit orders

Limit orders allow you to automate stock trading while controlling your entry and exit prices. However, they don’t guarantee execution. If the price hits your limit but changes before your order goes through, the trade won’t happen. Because of this, this type of order can be best if you’re not in a rush and want to prioritize favorable pricing – even if it means fewer trades.

Stop orders

Stop orders are similar to limit orders in that they automate stock trading; however, they differ because they don’t protect against negative slippage – or prices moving in an unfavorable direction. As a result, they can be a good fit if you’re okay with sacrificing price protection for a higher chance of execution.

If you want both the pricing control of limit orders and the higher execution of stop orders, you can opt for a stop-limit order. Doing so lets you set a stop price to trigger trades and a final limit price to control how much final prices can move in an unfavorable direction.

The bottom line

These three stock market order types allow you to initiate trades and automate future trading based on pre-determined parameters. The right order type for a particular situation depends on how soon you want the trade to go through and how much price control you want.

While utilizing a combination of these orders allows you to manage the details when you buy and sell stock, helping you achieve different objectives, it’s important to consider how any transaction fits into your larger strategy. Rather than trying to time the market or predict price fluctuations, there may be benefits to remaining invested and adopting a long-term perspective.

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