3.1 Order Types
Understanding order types is essential for the SIE exam and real-world trading. Each order type serves a specific purpose and carries different risks regarding price and execution certainty.
Market Orders
A market order instructs the broker to buy or sell a security immediately at the best available price.
Key Characteristics
Execution: Guaranteed (during market hours)
Price: Not guaranteed - next available price
Speed: Fastest execution
Best Use: When speed matters more than price
When to Use Market Orders
Highly liquid securities with narrow bid-ask spreads
When immediate execution is the priority
During normal market conditions (not extreme volatility)
Exam Tip: Market orders guarantee execution but NOT price. In volatile markets, the execution price may differ significantly from the last quoted price.
Limit Orders
A limit order sets a maximum purchase price or minimum sale price. The order executes only at the limit price or better.
Buy Limit Orders
Set below the current market price
Execute at the limit price or lower
Used when an investor wants to buy but only at a better (lower) price
Sell Limit Orders
Set above the current market price
Execute at the limit price or higher
Used when an investor wants to sell but only at a better (higher) price
Buy Limit: Placed below market, executes at limit price or lower
Sell Limit: Placed above market, executes at limit price or higher
Key Point: Limit orders guarantee price but NOT execution. If the market never reaches your limit price, the order won't execute.
Stop Orders (Stop-Loss Orders)
A stop order becomes a market order once the stock trades at or through the stop price (the "trigger").
Sell Stop Orders
Placed below the current market price
Protects a long position (stock you own)
Triggers when the price falls to the stop price
Once triggered, becomes a market order to sell
Example: You own stock at $50. Place a sell stop at $45 to limit potential losses. If the stock drops to $45, your stop triggers and sells at the next available price.
Buy Stop Orders
Placed above the current market price
Protects a short position (borrowed stock)
Triggers when the price rises to the stop price
Once triggered, becomes a market order to buy
Example: You're short stock at $50. Place a buy stop at $55 to limit losses. If stock rises to $55, your stop triggers and buys to cover your short.
Sell Stop: Placed below market, purpose is to protect long position
Buy Stop: Placed above market, purpose is to protect short position
Stop-Limit Orders
A stop-limit order combines features of stop and limit orders. When triggered, it becomes a limit order instead of a market order.
How It Works
1. Stop price reached: order activates
2. Activated order becomes a limit order
3. Executes only at limit price or better
Advantage and Disadvantage
Advantage: Price protection after trigger
Disadvantage: May not execute if price moves past limit
Warning: In a fast-moving market, a stop-limit order may not execute at all if the price gaps through your limit.
Memory Trick: SLoBS and BLiSS
This acronym helps remember where orders are placed relative to market price:
SLoBS = Sell Limit or Buy Stop
Placed ABOVE the market price
Sell Limit: Want to sell higher than current price
Buy Stop: Protects short position if price rises
BLiSS = Buy Limit or Sell Stop
Placed BELOW the market price
Buy Limit: Want to buy lower than current price
Sell Stop: Protects long position if price falls
SLoBS: Sell Limit, Buy Stop, above market
BLiSS: Buy Limit, Sell Stop, below market
Order Duration
Orders can have different time limits:
Day Order: Expires at end of trading day if not filled
GTC (Good-Til-Canceled): Remains active until filled or canceled
IOC (Immediate or Cancel): Fill immediately or cancel unfilled portion
AON (All or None): Must fill entire order or none at all
FOK (Fill or Kill): Fill entire order immediately or cancel
Discretionary vs. Non-Discretionary Orders
Non-Discretionary
The customer specifies all order details:
Security
Action (buy/sell)
Quantity
Price (if limit/stop)
Discretionary
The representative has authority to decide one or more of:
Which security
Whether to buy or sell
How many shares
Price
Important: Discretionary authority requires written authorization from the customer and supervisor approval of each trade.
Summary: Order Type Comparison
Market: Execution guaranteed? Yes. Price guaranteed? No. Best for speed/liquidity.
Limit: Execution guaranteed? No. Price guaranteed? Yes. Best for price control.
Stop: Execution guaranteed? No (until triggered). Price guaranteed? No. Best for loss protection.
Stop-Limit: Execution guaranteed? No. Price guaranteed? Yes (after trigger). Best for protection plus price control.