Order types and where stops sit

A market order buys or sells right now

How do you actually buy a stock? You tell your broker with an order. An order is your instruction to buy or sell, and it says how you want it done. Say Maria wants 100 shares of XYZ, and she wants them today. A few cents up or down doesn't matter to her. She wants to own the stock now.

So she uses a market order. A market order buys or sells right away at the best price available. Maria sends it, and she owns the shares in seconds. That gives you one sure thing and one unsure thing. The fill is guaranteed. The price isn't, because it can move before your order reaches the market.

On the exam, people often swap this with a limit order. A market order makes sure you get filled. A limit order protects your price, and that's the next lesson. Remember it this way. A market order buys or sells right away at the best price available. You're sure to get filled, but you're not sure of the price.

A limit order fills at your price or better

What if the price matters more to you than the speed? Then you use a limit order. A limit order buys or sells only at your price or better. Say XYZ trades at $26, and Maria thinks that's too much. She'll pay $25 and not a penny more. So she enters a buy limit order at $25.

Better, for a buyer, means lower. Her order fills at $25 or lower, if the price ever comes down that far. Until then, it waits. A seller flips it, because better, for a seller, means higher. A sell limit at $30 fills at $30 or higher.

The market price is what the stock trades at right now. Buy limits sit below the market price, and sell limits sit above it. Each one waits for a better deal. The mistake is thinking a limit order always fills. If the price never reaches your limit, the order sits there and never fills.

A limit order buys or sells only at your price or better. You're sure of the price, but you're not sure of the fill.

A stop order waits for a trigger, then becomes a market order

How do you limit a loss when you can't watch the screen all day? You use a stop order. A stop order waits for a price you pick, then becomes a market order. The price you pick is the stop price. A trade at or through it triggers the order. Then it's a market order, filled right away at the best price available.

Say Maria owns XYZ, trading at $55. She enters a sell stop at $50, below the market. If XYZ trades at $50 or lower, her order fires. A buy stop flips that and sits above the market. It protects a short seller, someone who sold borrowed shares and must buy them back later.

To remember the sides, use BLiSS. Buy Limits and Sell Stops sit below the market. Buy stops and sell limits sit above it. The mistake is mixing up a stop with a stop-limit. A stop-limit is triggered the same way, but it becomes a limit order. So it might not fill.

A stop order waits for a price you pick, then becomes a market order. The stop price is only the trigger.

Worked example: Protect a gain with a sell stop

1. A customer bought XYZ at $40, and it's now $55. They're up $15 a share. How do they protect most of that gain?
2. They enter a sell stop at $50, below the market. A sell stop protects stock you own, because it sells if the price falls.
3. The stock slides. It trades at $51, then $50.40. Both are above $50, so the stop keeps waiting.
4. Next it trades at $49.90. That's the first trade at or below $50, so the stop is triggered.
5. Now it's a market order, so it sells at the next available price. Say that's $49.80. The stop price set off the order, but it didn't promise a price.
6. The customer keeps $9.80 of the $15 gain. Remember, sell stops protect stock you own, and buy stops protect a short sale.

Common mistakes

Buy stops go above the market, sell stops below

The slip is putting a stop on the wrong side. A buy stop sits above the market, and it buys if the price rises to it. A sell stop sits below the market, and it sells if the price falls to it. A stop waits for the price to move to it.