Trade orders refer to the different types of orders that can operate under asset exchanges. 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 of trade orders:
The market order is the most common and simple of all trade orders. A market order simply executes the traders desired order volume at the best available price. This provides the trader with the most liquidity, but 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 at met at the best available price. In this example, the total order price will be approximately $101,000. 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 @ 203.10, plus all other higher ask prices.
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 execute at. This provides the trader with more control, but less liquidity. Liquidity is only provided once a buyer is willing to meet that traders 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.
Stop-loss orders work exactly the opposite way than limit orders do. A stop-loss order is intended to provide a trader with the most control if the order moves in the opposite direction intended. This type of order is intended to minimize losses, as opposed to maximize profits according to the limit order strategy.
The logic here is that the trade will want to hop unto an upward or downward trend before its too late and conditions worsen. It is easier to demonstrate with an 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-cancelled stop buy order at $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 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. Setting the stop-buy order allows a trader to jump in on a market before it’s too late and to minimize their losses. Without the stop-buy order, this trader would have lost $4 of potential profit ($215 – $211).
Interestingly, trade orders can be combined with each others to form complex trading strategies. These are also used in conjunction with call/put stock options.