To trade like a pro you need to understand market orders. These are orders used when trading to buy and sell. Each has a different job to do. Strip back the off-putting City jargon and you’ll find market orders easier to get your head around than the average outsider imagines.
But before we look at the individual order definitions, we need to mention how trades are constructed to properly understand market orders.
Market or limit – take your pick
Market orders come in several flavours. For example, a bog-standard order is simply that – an order to sell or buy an asset at the best possible price. While you may not be in control of the exact price, you are in control of when you make the trade.
In contrast, a limit order pre-sets the price you’re willing to pay, either buying or selling. Let’s look at limit orders briefly.
- If you felt you were happy to buy XYZ stock for 100p and it was trading at 105p, a limit order allows you to do that, provided the stock falls
- But while you may buy an asset more cheaply, a limit order will have its own fee, which you need to anticipate
- Say you buy 100 shares and you pay 500p a share. Your total £500 trade will include a commission fee, say £5, making £505 total. Some market orders are more expensive than others
Slippage, order book and depth of market
These three trading terms all share some overlap. Their essence comes down to the same thing – how buy and sell orders are structured, bought and sold. The aim is always to profit from price fluctuations.
Order book – simply lists the interest of buyers and sellers of an asset electronically. By looking at the order book you can see how much buy order interest there is at a certain price level.
An order book will detail limit orders (see further on) enabling traders to buy and sell at pre-agreed prices – provided an order can be filled.
Say you want to buy 1,000 shares. The order book will detail the buy and the sell price, say 100p and 102p. It would also list the same buy and sell prices for fewer or more shares. It’s how exchanges match orders.
Depth of market – Market depth can show the number of buy and sell orders for an asset. This is broken down further by price and bid and ask volumes – who is willing to buy or sell at a particular price and quantity.
It can give an idea of how many shares you can buy without affecting the underlying share price.
The greater the ‘depth’ the more room you have to buy without causing the share price to rise. Or look at it another way: the amount of shares that can be bought for a given price. Less depth of market means more volatility.
Slippage can be positive or negative. Slippage happens when there’s a lot of volatility hitting a security. So, when you actually make the trade you may pay less or more for it.
Volatility could be caused by a rash of economic or regulatory news. It can also occur depending on how popular a stock is. The more ‘liquid’ or popular a stock is, the less change of slippage – the imbalance of buyers versus sellers.
Right, let’s get to grips with the major market order types.
1. Stop loss order with an example
Stop losses are key to cutting risk whether you are going ‘long’ or ‘short’. You might buy a stock at 300p in the expectation it climbs in value thanks to positive market gossip or sentiment.
But you decide to put in a stop loss at, say, 275p. That might be to limit losses due to unexpectedly bad company results, or economic or political news that might hit the share price. In other words, your £9 stop loss is protecting yourself against a range of unknowables.
However, this order may not go ahead at 275p. It will go ahead at the best available price closest to 275p. That value is the stop price. If you place a stop loss order and the trade goes against you – even if that dip is short-lived – the stop loss order goes ahead regardless.
2. Stop limit order with an example
The second word ‘limit’ is the important one here. It means that once a stock hits a certain stop price, it will be sold at that price only. Let’s say you buy XYZ stock at 500p a share. You are quite sure you don’t want to lose more than 25p a share in the stock. You put in a stop limit order for 475p.
If the market drops past 475p you will still sell for 475p. That’s in contrast to a stop loss order where you are reliant on a stock breaking its fall to the nearest value to 475p. Which could be 250p in an extreme ‘bear’ market – or worse.
In other words, a stop limit order supplies you with more control over risk. However, if the stock never sinks below the level of your stop limit order it remains unsold.
3. Good-till-date (GTD) order
A good-till-date is a nifty market order tool letting you sell or buy stock at the price you pick, generally within 90 days.
Let’s say you own some Unilever stock. Tomorrow sees a quarterly trading statement from Unilever, which makes much of its earnings from overseas sales.
You know this consumer goods giant has been exposed to currency pressures not to mention frailer consumer confidence in the Far East, plus volatile raw material costs. So you’re concerned about a profit wobble and a share price fall.
Deploying a good-till-date lets you sell at a pre-determined value if Unilever shares slip post-results. If Unilever is selling for 3,000p, that good-till-date order could be 2,750p.
You can choose to extend a good-till-date to a pre-determined time in the future, though it must be a market day. After that date, the good-till-date order is simply cancelled.
4. Good-till-cancelled (GTC) order
A good-till-cancelled order is more or less self-explanatory: your market order, to buy or sell, stays in the market until you cancel it. Some good-till-cancelled orders may have a 30-day or 60-day run.
Let’s say you like the sound XYZ house-building stock which you think will continue to do well as long as UK interest rates stay low. But the 1,000p share price is more than you’re happy to pay. So you put in a good-till-cancelled order at 875p, allowing you to buy when the share price slips.
It goes the other way too. If you hold shares of XYZ at 1,000p but want to sell at 1,250p you can set a good-till-cancelled order. After a set time it’s cancelled or you may be notified to see if you want to extend.
There can be varying policy terms around good-till-cancelled orders including minimum share buying levels. So check with your broker.
5. Immediate-or-cancel (IOC) order
An immediate-or-cancel order is a market order where the buy or sell order must be made immediately with the broker. If there are any parts of the immediate-or-cancel order that can’t be bought or sold then that chunk of the market order is cancelled.
Let’s say you want to snap up 500 shares of XYZ stock selling at 10p a share. You send your buy order. But only 350 shares can be executed at 10p a share at that moment. The rest of the order is cancelled.
The good thing about this type of market order is that it supplies a measure of immediate certainty: you have managed to make a trade or buy shares at the price you want at the time you want. It also allows you to use the remainder of the balance as efficiently as you can.
6. Fill-Or-Kill (FOK) order
This is similar to an immediate-or-cancel market order but with one major difference – a fill-or-kill order must be made immediately and in full. If not, it’s cancelled.
Imagine you want to buy XYZ stock at 225p a share. In this case though you are buying a lot of shares – say 10,000. You want to make sure you buy at this price. A fill-or-kill ensures you can do that. If not possible, for whatever reason, the fill-or-kill trade is cancelled.
Bear in mind that when you buy a lot of shares at once, it often meaningfully drives the price of that share higher. A fill-or-kill generally means you can buy a lot at the price you want, quickly.