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.
7. All-Or-None (AON) order
This market order has some overlap with other orders. However, an all-or-none is a duration order. That’s to say this an all-or-none can be active for a full trading day or much longer.
Say you want to buy 1,000 shares of XYZ at 500p a share, but the stock is selling at 600p a share. You could have a bit of a wait before the price drops and your market maker is able to offer you the full amount of shares at 500p.
If an all-or-none market order can’t go ahead straight away it remains ‘live’ till cancelled or traded. An all-or-none order is always executed in full or not at all. Hence the name.
8. At-the-Opening order
The start of a trading day is when shares often move significantly. Especially if there has been major share movements from other markets overnight, be it in Asia or North America. Most major trading announcements are usually early morning.
An at-the-opening order is an immediate action command, buying or selling, at the start of the trading day. If an at-the-opening market order can’t be undertaken, in part or all, it must be cancelled.
A word of warning: if your at-the-opening order, for example, to sell 2,000 shares of XYZ is amongst many similar orders, your trade may be fulfilled at a price you weren’t expecting. An at-the-opening order can be very useful if your time is not flexible enough to trade as effectively as you want.
9. At-the Close order
In brief, an at-the-close order means a market order to sell at the closing price of the trading day – or as near as it can be achieved. If this isn’t possible the order must be cancelled. Usually an at-the-close market order will take place in the final 60 seconds of trading.
Depending on the liquidity or the availability of shares you should get close to the closing price. However, bid-ask spreads can widen just before the market closes.
Sometimes a limit order can be used with an at-the-close trade. This ensures your at-the-close order is not hit by unexpected volatility, which could affect the price you pay. Remember, volatility can be a friend as well as an enemy.
10. Buy stop order
They’re counter-intuitive but a buy-stop-order can be a clever market order in some circumstances. Say you’re interested in XYZ stock. It’s selling at 250p a share. But you place a buy-stop-order on the stock at 265p. In other words, you choose to trade when the market believes XYZ should be rising in price.
It means you’re buying when real price momentum is underway. This buy-stop-order order goes against many people’s instincts to buy low and sell high. A buy-stop-order is excellent discipline because your decision is taken without emotion clouding it.
11. Buy limit order
A buy-limit-order is a market order that lets you trade a security at any price at or below a set value. Deploying a buy-limit-order means you buy at your chosen price or less, not the current market value.
Let’s say XYZ stock is trading at 100p. You could put in a buy-limit-order at 70p. Whether XYZ actually sinks to this threshold is something else again. If it does the trade goes ahead automatically. However, if the trade or stock never sinks below your order value then the order won’t take place.
A buy-limit-order is useful when stock values are volatile and unpredictable. Be aware though that fees for buy-limit-orders can be higher than normal market orders.
12. Sell limit order
Limit orders ensure you buy your security at the best price possible. In other words, a sell limit order can only go through at a certain price above the current value.
Let’s say you own 50 shares of XYZ at 10p a share. You’re happy to use a sell limit order if the shares rise to 12p. Six weeks later the shares rise to 12.25p. A bit more than you specified – good news – as your shares can only be sold at the next available price.
However, if you have a very large holding then your sell limit order may not be filled if the bid-ask price changes direction quickly and heads lower. You need to have a sense of realism – if you place a sell price too high your order may not be fulfilled. But the good news is that a sell limit order gives you control over what you feel is an acceptable price.
13. Trailing Stop Loss order
This market order means you’re able to set a stop-loss at a percentage under the value of an asset.
The clever bit is that when the share price rises, so does the trailing stop loss value. And when share price momentum dries up and the price falls back, your trailing stop loss is still working for you.
Say you buy an unspecified amount of shares of XYZ at 100p a share. You tell your broker you can accept a 10% loss maximum – 90p – no more. So your trailing stop loss trigger is set at 10% below the market price.
But the stock moves to 120p after you buy. Happily for you, the trailing stop loss trigger allows you to keep much of that gain. The triggered sell price has now increased to 108p (10% of 120p).
This market order means you’ve enjoyed substantial protection from possible falls but have been also able to profit from more gains also.
14. Trailing Stop Limit order
Another variation on the market order loss order theme and similar to a trailing stop loss order: it’s still very much about minimising possible losses but also locking into the potential for gains.
A trailing stop limit lets you set a value on the maximum loss you might incur. But you’re free to take any share price gains – without limit.
Let’s say you own a security trading at 500p. A trailing stop limit order will keep a pre-determined distance either a fixed amount or a percentage of share value. You can have trailing stop limit order to either buy or sell.
15. One-Cancels-the-Other (OCO) Order
A one-cancels-the-other order is a useful risk reduction tool. An OCO comes into play when a pair of orders are made. However, when one market order goes ahead, the other gets automatically cancelled. It is sometimes called an order cancels order.
Let’s say you own 1,000 shares of a stock valued at 1,200p. Because you’re positive on the stock you set a limit order of 1,500p. But because you want to protect against any losses also you put in a stop loss order at 1,100p.
You can use these one-cancels-the-other as day orders or longer term good-till-cancelled orders. It can be difficult to predict trading conditions as well as be around to respond to them.
Setting up an automatic one-cancels-the-other marker order takes care of both scenarios as well as enforcing a strict buy/sell discipline for your trades.
16. Order Sends Order (OSO)
An order sends order means multiple orders are attached to a main order. For example, the main primary order is to buy 2,000 shares while buying 1,000 shares of another stock. A third order might also ensure that there’s a stop loss order attached to the primary order.
But this sequential train-of-action order sends order only becomes ‘active’ when the primary order goes ahead. Again, a useful risk management tool to keep emotion out of it.
17. Iceberg order
As the Titanic discovered, icebergs are bad news. Applied to the markets, an iceberg order, sometimes known as a reserve order, is where only one chunk is visible to all. But below the surface lies a hidden lump.
While the exposed part of the iceberg order gets priority at the exchange, the remaining chunk(s) don’t. An iceberg marker order is useful for institutions wanting to buy large volumes of shares or other securities but also wanting to conceal the full size.
Experienced traders are sometimes able to interpret an iceberg order from other orders and trade ahead of it, taking advantage of price differentials.