Market Orders

Fundamentals of Market Investing by Adam J. McKee

Back in the heyday of traders standing around in the “pits” and “posts” shouting orders at each other, there were no computers.  Stock prices were hard to get a grip on until a resourceful fellow invented the stock ticker.  This fascinating device was attached to a network (analog of course!) that constantly spat out the latest trade prices on a narrow ribbon of paper referred to as “the tape.”

The paper tape is long gone, and the devices have been relegated to museums, but the jargon they generated lives on.  To this day, when news comes out and prices change, it is said to have “hit the tape.”  Another holdover from those bygone days was because big, long corporate names wouldn’t fit on those early tapes (laser printers weren’t yet invented).  Each publicly traded company was issued a ticker symbol, and trades are placed by such symbols today.

The number of letters is not fixed.  Ford Motor Company, as you may suspect, trades under the symbol F.  Internet shorthand is to place a dollar sign in front of the ticker, so your followers know you are talking about a particular stock and not something else.  The single letter “tickers” were reserved very long ago, so they tend to be old stalwart companies.  United States Steel trades under the symbol X, so if you tweet about it, you can save many keystrokes by simply typing $X.  Be sure to drop the dollar sign when you are entering orders!  Some clever companies spell something memorable with their ticker, such as SnapChat’s ticker, SNAP.  Companies that use acronyms for common names such as GM, IBM, and AMD all use their names as tickers.

Stocks are not the only things that have ticker symbols.  Exchange Traded Funds (ETFs) also trade by ticker symbol, and they trade just like stocks.  Some index ETFs are so commonly traded that they are used as a shorthand for the index.  Some traders have given them names based on the ticker symbols.  The Dow Jones Industrial Average is sometimes referred to as the “diamonds” because a popular index ETF trades under the symbol DIA.  If a trader tweets “Short $SPY” it most likely means that she is of the opinion that the S&P 500 will decline in the near future.  Jargon is rampant on Wall Street, but if you trade often, you grow accustomed to it.

If you plan to invest without the assistance of a broker, you’ll need to know what types of orders are available and how to enter them.  You will likely find instruction now how to enter an order on your broker’s website, and you will also likely find online videos made by other customers that deal with issues that they found challenging.  As much as I advocate books and peer-reviewed scholarship, it is a mistake to undervalue video tutorials on services such as YouTube.  A picture paints a thousand words, but a video on how to add the 200-day moving average to a stock chart is priceless when you don’t already know.  If the below discussion of order types makes your head hurt, don’t worry about it.  Think of them as references to return to if you ever decide to invest in the markets with your own self-directed account.

Market orders.  A market order is an order to buy or sell a stock at the best available price.  Generally, this type of order will be executed immediately.  However, the price at which a market order will be executed is not guaranteed.  It is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed.  In fast-moving markets, the price at which a market order will execute often deviates from the last-traded price or “real-time” quote.  If other orders are executed first, the investor’s market order may be executed at a much higher price.  Bottom line:  Never use market orders.

Limit orders.  A limit order is an order to buy or sell a stock at a specific price or better.  A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.  A limit order is not guaranteed to execute.  A limit order can only be filled if the stock’s market price reaches the limit price.  While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a predetermined price for a stock.

Stop orders.  A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.  When the stop price is reached, a stop order becomes a market order.  A buy stop order is entered at a stop price above the current market price.  Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short.  A sell stop order is entered at a stop price below the current market price.  Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

Stop orders have some associated risks that you should consider.

  • Short-term market fluctuations in a stock’s price can activate a stop order, so a stop price should be selected carefully.
  • The stop price is not the guaranteed execution price for a stop order.  The stop price is a trigger that causes the stop order to become a market order.  The execution price an investor receives for this market order can deviate significantly from the stop price in a fast-moving market where prices change rapidly.  An investor can avoid the risk of a stop order executing at an unexpected price by placing a stop-limit order, but the limit price may prevent the order from being executed.
  • For certain types of stocks, some brokerage firms have different standards for determining whether a stop price has been reached.  For these stocks, some brokerage firms use only last-sale prices to trigger a stop order, while other firms use quotation prices.  Investors should check with their brokerage firms to determine the specific rules that will apply to stop orders.

Stop Limit Orders.  A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order.  once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better).  The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.

Stop Limit orders have some associated risks that you should consider.

  • As with all limit orders, a stop-limit order may not be executed if the stock’s price moves away from the specified limit price, which may occur in a fast-moving market.
  • Short-term market fluctuations in a stock’s price can activate a stop-limit order, so stop and limit prices should be selected carefully.
  • The stop price and the limit price for a stop-limit order do not have to be the same price.  For example, a sell stop limit order with a stop price of $3.00 may have a limit price of $2.50.  Such an order will become an active limit order if market prices reach $3.00, although the order could only be executed at a price of $2.50 or better.

For certain types of stocks, some brokerage firms have different standards for determining whether the stop price of a stop-limit order has been reached.  For these stocks, some brokerage firms use only last-sale prices to trigger a stop-limit order, while other firms use quotation prices.  Investors should check with their brokerage firms to determine the specific rules that will apply to stop-limit orders.


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