You will be able to choose an order type that matches what you care about more: getting filled or getting your price.
Rachel set a stop order on a US stock she held, at US$95, to limit her loss if it fell. It closed one evening at US$100. Overnight the company announced weak results, and the next session opened at US$88. She woke up to find her shares sold at about US$88, seven dollars below the price she thought she had protected. She had not understood what kind of order she had placed.
Every order type trades one thing for another. This lesson goes through the three main types, what each one promises, and the situation where each one hurts.
A market order tells the broker to buy or sell now at the best price available. In a busy market for a large fund during the regular session, the best available price is usually very close to the last price you saw. The order fills, and the difference is small.
The risk is in the phrase "best available". In a fast market, after news, at the open, or in a thinly traded stock or fund, the best available price can be some way from the last trade. If there are few sellers, a market buy order takes the cheapest offer, then the next, and the average price you pay can be higher than you expected. The order fills, but you do not control the price.
Use a market order when getting filled matters more than the exact price, and only when the spread is tight and the market is busy.
A limit order sets the worst price you will accept: the most you will pay when buying, or the least you will take when selling. If the market reaches your price or better, it fills. If it doesn't, nothing happens.
That protects you from bad fills. Hakim's 8pm order in lesson 6.1, US market hours from a Singapore timezone, would have been safe as a limit order: if the open had been far above his limit, it simply would not have filled.
The cost is that it may not fill at all. Set a buy limit too low and the market may rise without you. For a long-term investor making a regular purchase, setting a limit slightly above the current ask during the session, or near the previous close when placing it overnight, usually gets filled without paying a silly price. If it doesn't fill, you try again the next day.
A stop order sits dormant until the price reaches a trigger you set. Once the trigger is hit, it becomes a market order and fills at the best available price.
That is what happened to Rachel. Her trigger was US$95. The stock never traded at US$95. It closed at US$100 and opened at US$88, jumping straight past her trigger in what traders call a gap. The stop activated at the open and sold at the best available price, around US$88. A stop protects you when prices move smoothly. In a gap, it can fill far below the trigger.
Some brokers offer a stop-limit order, which becomes a limit order instead of a market order once triggered. It would not have sold Rachel's shares at US$88. But it might not have sold them at all, which is the limit order's trade-off again.
Stop orders can also be triggered by brief price swings in a thin market and sell you out of a holding you meant to keep. Most long-term investors in broad funds have little use for them.
Every order also has a duration. A day order is cancelled automatically if it has not filled by the end of the session. A good-till-cancelled order stays open until it fills or you cancel it, though some brokers cap how long that can be.
Forgotten good-till-cancelled orders are a classic mistake. You place a low buy limit, forget it, and three weeks later the price drops on bad news and the order fills, buying shares at a moment you would never have chosen. Check your open orders list every time you log in, and use day orders unless you have a reason to leave one open.
The choice comes down to one question: which matters more for this trade, getting filled or getting your price? For a monthly purchase of a broad fund, the price usually matters more, and a limit order placed at a sensible level serves well. For an urgent sale in a busy market, getting filled may matter more. Stops need the most care because they become market orders at the worst moment.
For the activity, go back through your last five trades. For each, note the order type, the price you got, and whether a different type would have served you better. If you have not traded yet, use five orders you plan to place.
Review your last five trades and write which order type you used, the price you got, and whether a different type would have served you better.
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