Market, Limit and Stop Orders: Which Should You Use?

What are market, limit and stop orders?

An order is your instruction to a broker to buy or sell. Each type makes a different trade-off between speed and price. We will use one made-up share for every example. Its bid, the best price buyers offer, is $19.95. Its ask, the best price sellers want, is $20.05.

• A market order buys or sells now, at the prices available. A market buy will probably fill near the $20.05 ask, but that price is not promised.
• A limit order sets your worst price. A buy limit at $20 means you will not pay more than $20 a share. But no seller has to accept it, so it may never fill.
• A stop order waits for a trigger price. If you own the share, a sell stop at $18 does nothing until the price reaches $18. Then it usually becomes a market order.
• A stop-limit order also waits for a trigger, but then becomes a limit order. A sell stop-limit with an $18 trigger and a $17.90 limit will not sell below $17.90.

FINRA's guide to order types explains these for US shares. Your broker's names and rules may differ, so read its own order instructions too.

Why can a stop order sell below my stop price?

A stop is a trigger, not a promise. Prices do not always move one cent at a time. Sometimes they jump. A jump with no trades in between is called a gap. It often happens overnight, when news comes out while the market is closed.

Say you own the share and have a sell stop at $18. Bad news comes out overnight, and the next morning the share opens at $17. Your stop triggers, but the first price available is about $17, not $18. So that is where it sells.

With a stop-limit at $18 and a $17.90 limit, the order would not sell at $17. That protects your price, but you still own the share while it keeps falling. Neither order can promise both a minimum price and a sure exit.

Which matters more: the price or getting filled?

Before every order, ask yourself one question: what matters more right now, the price or the fill?

• If getting in or out quickly matters most, a market order fits. You accept that the price can change. Market orders usually fill closer to the quote in busy shares with small spreads.
• If the price matters most, a limit order fits. You accept that the order might not fill, or might fill only partly.
• If you want an automatic exit when the price falls, a stop order fits. You accept that a gap can fill it lower.

Also check how long your order lasts. Some orders end when the market closes that day, while others stay open until you cancel them. Check whether your order can fill before or after normal market hours too.

An order type changes your instruction. It does not turn a bad trade into a good one.

What is a partial fill?

Sometimes only part of an order fills. This is a partial fill. Imagine you want 50 shares. Sellers offer 20 shares at $20.05 and another 30 at $20.10. Assume those offers stay in place and there are no fees.

The first ask was $20.05, but the market order paid $20.08 on average, because only 20 shares were on offer at $20.05.

Now say your screen shows "20 filled, 30 open". Before you send another order, check what you already own and whether the first order is still active. A new order for 50 shares is a brand new instruction, not the missing 30. If both fill, you could end up with 100 shares by mistake.

When you practise, write down the order number, how many shares filled and how many are still open.

What should I check before I press submit?

1. Buy or sell, the right symbol, the number of shares and the right account.
2. That the prices are live, and how wide the bid-ask spread is.
3. How long the order lasts, and whether it can fill outside normal hours.
4. How your broker triggers stops and handles partial fills.
5. The status of any open order before you change or replace it, so you do not send it twice.

Practise these steps in a simulator, and keep notes in a paper trading journal, especially when something surprises you. The SEC also has a short glossary of order types.

Next lesson: how to read a stock chart. After that, paper trading lets you try each order with virtual money. Our stock market simulators guide compares free places to do that. To plan where a stop and a target go, see the risk-reward lesson.