The main types of brokerage orders are market, limit and stop orders. Market orders are executed at the best price available in the market. Limit orders are filled only at the specified limit price or better. Stop orders become market orders at the stop price. Stop-limit orders combine the features of stop and limit orders. They become limit orders at the stop price and executed at the limit price or better.
The limit prices for buy and sell limit orders are below and above the current market price, respectively. For example, a limit sell order with a limit price of $9.50 will execute only at $9.50 or higher. The advantage of a limit order over a market order is that an investor controls the price when he enters or exits a stock position. The stop prices for buy and sell stop-limit orders are above and below the current market prices, respectively; the limit prices are above and below the stop prices, respectively. A stop-limit order will execute only within the stop and limit prices. For example, if an investor places a stop-limit buy order with a stop price of $10.50 and limit price of $10.75, his order fills only within this price range. The advantage of stop-limit orders is that investors control the price range of an order fill.
Limit orders guarantee prices, but not fills, because market prices may never reach the limit prices. A stop-limit order is not triggered if the stock does not trade at the stop price. For example, a stop-limit sell order with a stop price of $10 and a limit price of $9.50 will not be sent to the exchange if the stock price stays above $10 for the duration of the order. It will also not be filled if the price drops sharply to $9 because that is below the limit price. Investors should use market orders if filling the order is more important than the price received or paid.
Stock prices sometimes move several percentage points within minutes, which could result in order fills at unexpected prices. Limit orders have an advantage over market orders in fast-moving markets because the order is filled only at a specified price. However, if the price drops or rises sharply, the investor may end up locking in substantial losses. For example, if an investor fills a limit buy order at $5 but the price drops sharply to $3 by the end of the trading session, she has locked in losses of $2 a share. The advantage of stop-limit orders over other types of orders is that they fill only within the stop and limit prices. However, investors could also lock in substantial losses if prices move sharply past the limit price before their orders are filled.
Market orders are usually filled immediately. Therefore, they suit investors who want to own or dispose of stocks, irrespective of price. Limit orders are suitable for investors who want to enter or exit stock positions at specific prices and are not concerned if orders remain unfilled. Investors typically use stop-limit buy orders to protect losses on short positions and stop-limit sell orders to lock-in profits or limit losses on long positions.