🎯 In 30 seconds: Every order trades off two things: certainty of getting filled and control over the price. A market order almost always fills but at an unknown price. A limit order controls the price but may never fill. A stop order waits until a trigger price is hit and then becomes a market order, so it can fill far below the stop when a stock gaps. A stop-limit caps the price but may not fill at all. A trailing stop moves the trigger up as the price rises. Time in force decides how long the order lives. Know exactly which risk you are choosing.
The trade-off behind every order
When you place an order, you are giving instructions to your broker. Those instructions can say "fill me now, whatever the price", or "only at this price or better", or "do nothing until this happens".
No order type gives you both a guaranteed fill and a guaranteed price. Picking an order type means picking which of the two you are willing to give up.
| Order type | Fill guaranteed? | Price guaranteed? | Typical use |
|---|---|---|---|
| Market | Nearly always, for liquid stocks in regular hours | No | Small orders in very busy stocks |
| Limit | No | Yes, your price or better | Most entries and exits |
| Stop (stop-market) | Yes, once triggered | No | Exit if the price moves against you |
| Stop-limit | No | Yes, once triggered | Exit with a floor price |
| Trailing stop | Yes, once triggered | No | Protect a gain while letting it run |
Market orders
A market order says "buy (or sell) now at the best available price". For a buy, that is usually close to the ask. For a sell, close to the bid.
For a few shares of a heavily traded stock during regular hours, the fill is usually within a cent or two of the quote. The risk shows up in three situations: fast markets after news, thinly traded stocks with wide spreads, and orders placed while the market is closed. A market order entered at night executes at the next open, which can be far from yesterday's close.
Limit orders
A limit order sets the worst price you accept. A buy limit at $20.00 fills at $20.00 or lower. A sell limit at $25.00 fills at $25.00 or higher.
The cost of that control is that the order may not fill. Even if the price touches your limit, other orders at the same price may be ahead of yours in the queue. A limit order that sits away from the market is waiting for the market to come to you.
A practical way to use limits: to buy now, set the limit at or a few cents above the ask. You will usually fill at the ask or better, and you are protected if the price jumps in the second before your order arrives. To sell now, set it at or a little below the bid.
Stop orders and stop-limit orders
A stop order (also called a stop-market or stop-loss order) sits inactive until the price reaches the stop price. Then it becomes a market order. A sell stop sits below the current price and is used to limit a loss. A buy stop sits above the current price and is used to cover a short or enter on a breakout.
The key fact, stated plainly by the SEC: the stop price is a trigger, not a promise. Once triggered, the execution price can be very different from the stop price.
A stop-limit order has two prices: the stop that triggers it and a limit that sets the worst acceptable price. Once triggered it becomes a limit order. It will not sell below your limit, but if the price drops through the limit without trading there, the order sits unfilled while the stock keeps falling.
Brokers and venues decide what triggers a stop. Some use the last trade price, others use quotes. Many brokers do not trigger stops outside the regular session. Check your broker's rules.
Worked example: a gap through a stop
All numbers are hypothetical. You own 100 shares of Company X, bought at $50.00. You place a sell stop at $47.00, planning to lose at most $300. The stock closes at $48.00. That evening the company cuts its forecast. The next morning it opens at $44.00 and drifts down to about $40 over the next few days.
| Planned loss: 100 x ($50.00 to $47.00) | $300 |
| Stop-market fills near $44.00: 100 x $6.00 | about $600 realized loss |
| Stop-limit at $47.00 / $46.50 does not fill; stock at $40.20 days later | $980 loss on paper, still holding |
Neither order "failed". Each did exactly what it was designed to do. The stop-market order got you out at a bad price. The stop-limit protected the price and left you holding a falling stock. In a gap, you cannot have both.
Trailing stops
A trailing stop sets the stop a fixed dollar amount or percentage away from the price. When the price moves in your favor, the stop moves with it. When the price moves against you, the stop stays put. Once triggered, it becomes a market order, so the gap risk above still applies.
Worked example (hypothetical). You buy 100 shares at $50.00 with a $3.00 trailing stop. The stop starts at $47.00.
| Price rises to $52, stop moves to | $49.00 |
| Price dips to $51, stop stays at | $49.00 |
| Price rises to $55, then $58, stop moves to | $52.00, then $55.00 |
| Price falls to $56, then through $55 | Stop triggers |
| Approximate result: 100 x ($55.00 to $50.00) | +$500 before costs |
The hard part is the distance. Too tight, and normal day-to-day wiggles trigger it, which the SEC warns about directly. Too loose, and you give back a large part of the gain. Many traders set the distance using the stock's typical daily range, measured by Average True Range. See Volatility tools.
Time in force: how long the order lives
- Day: active for the current regular session only. Unfilled shares are canceled at the close. The default at most brokers.
- Good-til-canceled (GTC): stays open across days until it fills or you cancel it. Brokers set a maximum life, often a few months, so check yours.
- Immediate-or-cancel (IOC): fill whatever you can right now, cancel the rest.
- Fill-or-kill (FOK): fill the whole order right now, or cancel all of it.
- All-or-none (AON): fill the whole quantity or nothing, but it can wait. Not every broker offers it.
Forgotten GTC orders cause real problems. A GTC buy limit placed weeks ago can fill after bad news drops the price into it. Review your open orders every week.
Orders outside regular hours
Most brokers offer pre-market and after-hours sessions, and some now offer overnight trading. Rules differ from broker to broker, but common patterns are: only limit orders are accepted, stops do not trigger, and you have to mark the order as eligible for extended hours.
FINRA lists the main risks: fewer buyers and sellers, so your order may fill partly or not at all; larger price swings; wider spreads; and prices that differ between venues because the national best price protection that applies in regular hours does not apply. See Market hours and settlement.
Try it
In the paper portfolio, pick a stock from your watchlist. Place a buy limit a few cents above the ask and a second one 3% below the current price. Then, for the position that fills, write down where you would put a stop, a stop-limit and a $2 trailing stop, and what each would do if the stock opened 10% lower tomorrow. You can set price alerts at the same levels to watch them in real time.
- What happens when a stock reaches the price on your stop order? Answer: The stop order becomes a market order. The stop price is a trigger, not a promise, so the fill can be very different from it.
- You place a buy limit at $20.00. At what prices can it fill? Answer: At $20.00 or lower.
- You own 100 shares bought at $50.00 with a sell stop at $47.00. Bad news comes out overnight and the stock opens at $44.00. About what is your loss? Answer: About $600 (100 x $6.00), not the $300 you planned. The stop-market order sold near $44 at the open.
- You buy at $50.00 with a $3.00 trailing stop. The price rises to $58, then falls. Where does the stop trigger? Answer: At $55.00. The stop only moves up, so it stayed at $55 when the price fell from $58.