3.1 Order Types
Key Takeaways
Market orders guarantee execution but not price, while limit orders guarantee price but not execution
Sell stop orders are placed below market to protect long positions; buy stop orders are placed above market to protect short positions
SLoBS (Sell Limit or Buy Stop) orders are placed above the market, while BLiSS (Buy Limit or Sell Stop) orders are placed below the market
Stop-limit orders combine features of both stop and limit orders - when triggered, they become limit orders instead of market orders
Discretionary orders require written authorization from the customer and supervisor approval of each trade
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
| Feature | Market Order |
|---|---|
| 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
| Order Type | Placed | Executes At |
|---|---|---|
| Buy Limit | Below market | Limit price or lower |
| Sell Limit | Above market | 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.
| Order Type | Placed | Purpose |
|---|---|---|
| Sell Stop | Below market | Protect long position |
| Buy Stop | Above market | 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
- Stop price reached → order activates
- Activated order becomes a limit order
- Executes only at limit price or better
Advantage and Disadvantage
| Stop-Limit | |
|---|---|
| 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
| Acronym | Orders | Placement |
|---|---|---|
| SLoBS | Sell Limit, Buy Stop | Above market |
| BLiSS | Buy Limit, Sell Stop | Below market |
Order Duration
Orders can have different time limits:
| Duration | Meaning |
|---|---|
| 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
| Order Type | Execution Guaranteed? | Price Guaranteed? | Best For |
|---|---|---|---|
| Market | Yes | No | Speed/liquidity |
| Limit | No | Yes | Price control |
| Stop | No (until triggered) | No | Loss protection |
| Stop-Limit | No | Yes (after trigger) | Protection + price control |
An investor owns 100 shares of XYZ stock currently trading at $50. To protect against a decline in price, the investor should place a:
Buy stop order below $50
Sell stop order below $50
Buy limit order above $50
Sell limit order below $50
Which order type guarantees execution but NOT price?
Limit order
Stop-limit order
Market order
Good-til-canceled order
Using the SLoBS and BLiSS memory trick, which orders are placed ABOVE the current market price?
Buy limit and sell stop
Sell limit and buy stop
Buy limit and buy stop
Sell limit and sell stop
Sections you finish are checked off in the contents.