Trade orders refer to the different types of orders that can be placed on trading exchanges for financial assets, such as stocks or futures contracts. The order-driven style of trading mechanisms matches buyers and sellers who have matching order criteria. In other words, a buyer with a buy price matching the sell price of a seller will result in an executed trade.
The different types of trade orders allow the trader to maximize the versatility and specificity of their trades.
These are the most common types:
Trade Orders: Market Order
The market order is the most common and simplest of all trade orders. A market order simply executes the trader’s desired order volume at the best available price. This provides the trader with the most liquidity but the least control on pricing.
For example, a buy market order for 5 shares of company A will purchase 5 shares at the current lowest ask price in the order book.
For more complicated market orders, a trade will execute at the best consecutive available prices. Let’s take our example further and say that 500 shares of company A are to be purchased in a market order. The order book at trade time is as follows:
Since 500 shares are not available at the best ask price, the trade will execute continuously until 500 shares are met at the best available price. In this example, the total order price will be approximately $101,142.50. The average market order price for this trade order will be $202.29.
After these trade orders are executed, the book will update and clear the top three rows. The new order book will have the remaining 50 shares at $203.10, plus all other higher ask prices.
Trade Orders: Limit Orders
The limit order is more complex than the market order. It creates a new order in the order book, often at a “lower” spot than the best available prices on either side. Doing so sets the ideal price a trader wishes to enter the market at. This provides the trader with more price control but less liquidity. Liquidity is only provided once a counterparty is willing to meet that trader’s price.
A limit sell order will only execute at or higher than the order price.
A limit buy order will only execute at or lower than the order price.
In our example above, perhaps a seller wishes to add a limit ask order for 50 shares at $203.10. That would change the order book to a total of 150 shares available at the $203.10 level. This trade will only execute once buyers are willing to pay that price, or once market orders have cleared enough orders up to that tier.
The “market” for all limit orders in an order book is the best available price. This means the lowest sell price (ask) and the highest buy price (bid) are the market. Prices that are worse than these prices (higher ask, lower bid) are called behind the market. New orders that are better than these prices are called in the market. New orders significantly better than these prices are marketable.
Trade Orders: Stop-loss Orders
Stop-loss orders work exactly the opposite way that limit orders do. A stop-loss order is intended to provide a trader with the most control if the market moves in the opposite direction the trader desires. This type of order is intended to minimize losses, as opposed to maximizing profits according to the limit order strategy. A stop-loss order is usually entered as a potential exit order to close out an existing trade position but may also be used to enter the market if the price moves to a specified level.
A stop buy order will execute once the market is at or higher than the order price.
A stop sell order will execute once the market is at or lower than the order price.
It is easier to demonstrate with an example.
Trade Orders: Stop-loss Order Example
Let’s assume a trader wishes to purchase X shares at $200. The market is currently trading at $202, so he is hoping for a drop to $200 to jump into the market. Thus, he has a limit buy order set to $200. However, he also sets a good-until-canceled stop buy order at $210 because he definitely wants to be in the market if the price rises to $210. The next day, the market rallies and opens at $211. His trade executes at $211.
At the time the trader checks the market a couple of hours after open, the stock is now trading at $215. Had he not set the stop buy order, he would have to purchase with a market order at $215. Without the stop-buy order, this trader would have lost $4 of potential profit ($215 – $211).
Advanced Trade Orders
Interestingly, trade orders can be combined with each other to form complex trading strategies. These are also used in conjunction with call/put stock options.
CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: