This article is from the Investing Articles: Stocks and Options series.
The market order is probably the most common. When you place an order at the market, you are telling the broker to buy or sell the stock at the best possible price at that time. A market order will always be filled. The catch is that it may not be filled at the price you expected or wanted. For instance, you want to buy XYZ. You call your broker and he tells you that XYZ is currently trading at 95 bid 95-1/8 ask. The bid is the price the specialist is willing to buy the stock at. The ask is the price the specialist is willing to sell the stock at. You tell him to buy 100 shares of XYZ at the market. When the broker gets back to you, he tells you that he bought 100 share of XYZ at 95-3/8. What happened? Between the time you gave the broker the order and the order was filled by the specialist, the price went up. Keep in mind, that the price of XYZ could have easily been filled at 89-7/8 had more people been selling rather than buying at that time.
A 'Limit Order' is an instruction by you to your broker to buy or sell a specific amount of stock at a specific price or better. If the price you specify is not within the current market quote, it is said to be 'away from the market' and will be entered into the specialists book beneath any other orders in the specialists book. What this means is that there are shares ahead of you. Orders in the specialists book get filled in the order that they were received. This happens quite frequently. In fact, the other day, we had this with a trade. We left an order, which was our stop loss order, actually a limit order, to close a position if the stock hit a certain price. The stock did hit the price. However, there were orders ahead and we never got filled. We were left in the position. There is no guarantee that a limit order will ever be filled.
When deciding whether to place a limit order or a market order, the trader needs to evaluate the tradeoff between a guaranteed fill which might be different than what you expect, and getting the price you want but perhaps not getting filled. It all depends on your analysis and your needs. A stop order is an order which becomes a market order to buy or sell once the stock hits the target price. Generally, I use stop orders when I definitely want to get out of a stock, and limit orders when I want to get my price.
There is also a stop limit order. A buy stop limit means that as soon as a trade occurs at the target price, the order becomes a limit order to buy. A sell stop limit order means that as soon as the stock hits a target price, the order becomes a limit order to sell.
There are also three types of orders which can be placed with respect to the duration of time the order stays open. The first is called a 'Day Order'. A day order is good just as the name implies: for the day only. At the end of the day if the order is not filled, it goes in the trash.
The second type of order is called 'Good Till Canceled' (GTC). An order which is Good Till Canceled, GTC, means that until you tell your broker to cancel the order, the order remains open on the specialists book and can be filled any time. In practice, however, a GTC order has to be reconfirmed by the broker twice a year (every six months). This is not six months from the time the order was placed. The exchanges decided that the last business day in April and the last business day in October are the days when GTC orders must be reconfirmed. After all, how would you like it if you placed a GTC order two years ago, forgot about it, and then found out two years later that you had just sold or purchased a particular stock.
The last type of order is most frequently used in options and futures trading on a day trading basis. However, it may also be used in stock trading. And not all firms will accept it. It's called a 'Fill or Kill' order. Usually, it's placed with a time limit. For instance, a '10 minute fill or kill' means that if the order is not filled in the next ten minutes, kill the order. A few years ago, the best options broker I ever dealt with didn't take these orders. However, after discussing it with them, they said that they had no problem me calling back in ten minutes or what ever time frame and canceling the order. So I did that. It's a lot easier when we go right to the floor now.