The term "closing order" can have a couple of different meanings in stock market trading. One meaning refers to a specific type of order, and another is a way to verify your purpose for placing an order. The second meaning is the more commonly used of the two. Using the term "closing order" in your stock market trading will keep you in or out of stocks without placing erroneous orders.
Buy Then Sell
To the average investor, investing in the stock market involves buying shares of stock. If the investor no longer wants to own the shares, he sells the stock he owns. The act of buying shares is referred to as a buy order and selling is a sell order. In this case the sell order closes out the investor's position in the stock, so the sell order is a closing order. Any stock market order that closes a position an investor or trader is carrying on his account is a closing order.
Trading Both Sides
The designation of an order as a closing order becomes more important when using trading strategies besides just buying shares. If a trader sells stock short, the opening order is a sell order, which means the closing order will be a buy order. Designating the order to close a short sale position as a "buy to close" makes clear exactly the intentions of the trade. Stock market options trades can also be initiated with either a buy or sell order, and an active options trader may have different open positions of both types. Designating an order as a buy or sell to close makes it clear what the trade intends to accomplish.
Using Stops and Limits
The use of stop and limit orders allows investors to set up closing orders that are triggered when a stock hits a certain price. For example, an investor owns shares of a stock and wants to sell if either the stock declines to a certain price or to lock in a profit if it increases to a target price. A stop order will close out the stock position if the shares decline to the stop loss price, and a limit order will be triggered to lock in a profit if the stock increases. For stocks sold short, the stop price goes above the current share price and the limit price will be below the share price.
Market on Close
A very specific type of stock market order is called a market-on-close -- MOC -- order. An MOC order is entered during the market day and is executed during the last minute the stock market is open. The goal is to buy -- or sell short -- shares of stock at or very close to the closing price for the day. In contrast to the other uses of the term "closing order," a market on close order can be used to either open or close a trading position in a stock.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.