Investing · Reference

Order Types: What Each One Guarantees

A market order guarantees execution, a limit order guarantees price. No order type guarantees both, and that is the whole subject.

Every order type is a position on one trade-off: certainty of execution against certainty of price. Understanding which one you have given up is the difference between a tool and a trap.

Market order

Fills immediately at whatever the book offers. You are guaranteed to trade; you are guaranteed nothing about the price.

In a liquid security that distinction is academic — a fund trading hundreds of millions of dollars a day has a spread of a cent and your order is filled inside it. In a thin one it is not academic at all: the book may be a few hundred shares deep at the quoted price, and a larger market order walks up through progressively worse prices until it is filled. The average price you receive can be materially away from the quote you saw.

The dangerous case is a market order placed outside trading hours or into the opening auction, when the book is thinnest and the quote you are looking at is stale.

Limit order

Fills only at your price or better. You are guaranteed the price; you are guaranteed nothing about being filled.

The failure mode is the mirror image: the security moves away and you are left holding an unfilled order while the thing you wanted to buy rises without you. A limit set slightly too aggressively to avoid a cent of spread is the most common way to miss a trade entirely.

Limit orders are also the correct default for anything thinly traded, where the spread is wide enough that accepting it blindly costs more than waiting.

Stop order

Dormant until the price reaches your trigger, at which point it becomes a market order. That last clause is the one that catches people: a stop does not guarantee you exit at the stop price. It guarantees you start trying to exit at the stop price.

In a fast decline the next available price can be far below the trigger, which is exactly the scenario a stop was meant to protect against. Gaps between sessions do the same thing — a stop at $50 on something that opens at $42 fills near $42.

Stop-limit order

Becomes a limit order rather than a market order when triggered, so it caps how bad a fill you accept. It also reintroduces the possibility of no fill at all: if the price passes straight through your limit, the order sits unfilled while the position keeps falling. You have exchanged an uncontrolled price for an uncontrolled outcome.

Time in force

Day — expires at the close. The default in most places.
GTC (good till cancelled) — persists across sessions, usually capped by the broker at 30 to 90 days. Worth reviewing: a forgotten GTC order from three months ago can fill on news you have not thought about since.
IOC / FOK — fill what you can immediately and cancel the rest, or fill entirely or not at all. Institutional tools, occasionally useful for large orders in thin books.

Choosing

The deciding question is which failure you would rather have. If missing the trade entirely is the worse outcome — you are establishing a long-term position, the price is incidental — a market order in a liquid security is fine. If paying an unexpected price is the worse outcome, use a limit and accept that you will sometimes not trade.

The liquidity of what you are trading decides how much this matters. Daily traded value for any ticker is on its page in the correlation finder; the difference between something trading hundreds of millions a day and something trading a few million is the difference between these choices being theoretical and being expensive.

Reference material, not investment advice. Order type availability and behaviour vary by broker and venue.