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

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

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.

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

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

Order Duration

Orders can have different time limits:

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