Investors should be aware of the different order types before trading securities. For example, market orders, limit orders, and stop orders are common order types used to buy or sell stocks and ETFs. Understanding the difference between these three types of orders is important because each results in a different outcome for the investor.
1. Market Orders
Market orders prioritize speed. The order to buy or sell is typically executed immediately as long as there are willing buyers or sellers on the other end to fill the order at the best price currently available.
It’s important to note that with market orders, there is no guarantee the current market price won’t change before the order is executed. This may result in buying a security at a higher price than expected, for example.
2. Limit Orders
Limit orders control the price. A limit order ensures the trade is executed only if the price reaches the specified limit price or better, guaranteeing the trader is buying or selling at a specified price (or better).
The potential downside to limit orders is the potential for the market price to move away from the limit price before it can be filled. In turn, this could potentially result in a missed trading opportunity.
3. Stop and Stop-Limit Orders
Stop and stop-limit orders are orders to buy or sell a security at the market price only when it reaches a specified price, which is the stop price.
For stop-limit orders, once the security reaches the specified stop price, they become limit orders. This means that once the stop price is reached, the trade will be executed at the specified limit price rather than the current market price. If the stock fails to reach the stop price, it will not be executed.
Stop-limit orders can be used to buy or sell. For online trades in the Canadian market, the stop limit must be within 10% of the stop price, according to Scotiabank.
For stop orders, also known as stop-loss orders, once the security reaches the specified stop price, they become market orders to be executed at the best price available. This means stop orders could be executed at a price significantly higher or lower than the stop price. If the stock fails to reach the stop price, the order will not be executed. However, stop orders are not permitted on Canadian, OTC Bulletin Board, or OTC Pink Marketplaces, according to Scotiabank.
For both order types, if the stock fails to reach the stop price, the order will not be executed.
Scotia iTRADE ® (Order-Execution Only) is a division of Scotia Capital Inc. (“SCI”). SCI is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Scotia iTRADE does not provide investment advice or recommendations and investors are responsible for their own investment decisions.
®Registered trademark of The Bank of Nova Scotia, used under license.