What is an order?
Looking for an order definition? Ordering, whether goods, services, currencies or anything else, is central to the workings of a market economy. An order is an expression of one party’s wish to obtain whatever is specified in the order. In essence, therefore, an order is an instruction to a broker or brokerage firm to buy or sell. But the types of orders used in the investment world, finance orders, tend to be more complex, given that they are designed to perform an array of tasks.
Where have you heard about orders?
As an investor, you will be familiar with at least some of the types of finance orders that are used in the markets. Your investment adviser or stockbroker may have spoken to you about the most straightforward, such as the market order, and investment guides will have provided at least an introduction to the limit order and the stop-loss order. Financial media will comment on the interplay of various types of orders in a given trading period, seeking to draw conclusions as to the mood of the market.
What you need to know about orders…
Orders, in their various modern forms, are the heartbeat of investment. Whereas some form of signalling as to the wishes of buyers and sellers is the pre-requisite of any type of financial exchange, the scale and speed of today’s markets would be impossible were it not for the sophisticated order system that has grown up over the years, much of it automated.
As the world’s exchanges process and execute millions of orders a day, orders trigger other orders, as price movements bring into play instructions that may otherwise have lain dormant. Such is the international nature of modern investment that these linkages and knock-on effects are global.
That makes it all the more vital that the mechanisms for clearing orders operated by the various exchanges and by banks and brokerages be as secure and robust as possible. Not for nothing do writers of financial thrillers frequently use a fictional breakdown of the investment clearing system in their plots!
The market order is the most basic and probably most common type of finance order. It is sometimes known as an ‘at-market’ order, because it comprises an instruction to buy or sell at the best obtainable price in the market, right now. There are no conditions attached in terms of price and no limits, up or down, beyond which the order is to be left unfilled.
For the investor, the good news is that, barring a sudden disappearance of market liquidity or a loss of availability of the asset in question, their order will be filled. As there are no preconditions, the instruction will be executed.
Less welcome is the fact that securities bought through a market order may be unfavourably priced, for one of a number of reasons. The price may have moved adversely, one way or the other, at the point at which the market order was executed, as opposed to the moment at which it was drawn up, however recently that may have been.
Or the price quoted ahead of the trade may not be the same price at which the order was carried out.
A market order may prove impossible to countermand in time to stop it being executed at a price that is far less advantageous than had been expected.
Investors need to remember that buying or selling ‘at market’ means taking whatever is on offer at the time the trade goes through.
A limit order is designed to rectify some of the shortcomings of the market order. As the name suggests, a limit orderis an order that is to be filled only within certain limits, in other words provided certain price conditions are met. It is a form of market order with safeguards.
While the market order takes effect pretty much instantly, there being no conditions to be met, the limit order is activated only once market movements satisfy the criteria embedded in the order.
Thus, a limit order to buy a security will be triggered when the price is either at the specified limit or lower, while a limit order to sell will take effect only when the price is at the limit or higher.
For the investor or trader, the limit order allows them to fine tune their actions in the market, avoiding the adverse outcomes that can result from a market order. But unlike a market order, there is no guarantee that a limit order will ever be filled.
Stop-loss orders are, in a sense, the mirror image of the limit order. As the name suggests, the stop-loss order ‘stops’ trading when a certain price point has been reached. Thus, buying would be halted once the price has risen above a specified level, and selling triggered once it dips below a certain price.
The intention in the former case is to allow the investor or trader to form a view on whether the uptrend in the price is likely to continue or whether it would be inadvisable to buy more of what could well be over-priced securities.
In the latter case, the idea is quite simply to limit the potential losses from continuing price declines. It reflects the notion that no investment ‘owes’ the investor a certain return and is intended to guard against irrational human behaviour in terms of hanging on to a position on the grounds that it is ‘bound to recover’.
In both cases, the stop-loss order is destined to help investors to run profits and cut losses.
The contract-for-difference (CFD) order
CFDs are of recent vintage but during their short life have become hugely popular with investors. A CFD order takes the form of a futures contract arranging for the payment of the difference between two prices in cash rather than in the delivery of commodities or paper securities. Essentially, a CFD order is an arrangement between an investor and a broker to pit their respective judgments as to a price movement, such as that of a stock or a currency, against each other. At the expiry of the CFD period, whatever have been the price movements of the underlying asset will determine which party has to pay the difference.
CFD orders allow investors to speculate on securities without having to own them.
Other aspects of orders
Some orders have a set ‘duration’, perhaps one day or a specific date. If they have not been filled by this time, then they expire. By definition, market orders do not have a duration, being instant. Another type of duration order is called ‘good til cancelled’ (GTC). This remains in the market until either it is filled or is cancelled. By contrast, the ‘fill or kill’ order must be executed, in full, immediately, or it is automatically cancelled.
Elsewhere, the ‘one cancels the other’ (OCO) order lets traders place several orders at the same time. When one is filled, all the others are cancelled.