What are the different order types?

Justin Ling Updated by Justin Ling

Below are the 5 steps you should take when placing an order for a trade.   

STEP 1:  Select Action

When placing an order, you first must decide on the order’s ACTION. Are you buying? Are you selling? Are you selling something you don’t own? Are you buying to cover your short?

BUY: When you buy, you have a long position, betting that the value of the security you own will grow. You own the security and can sell them at any time. 

For example, if I buy 100 shares of AAPL at $50 per share, my hope is that shares’ price will rise, so I can eventually sell and make a profit. 

The risk with buying, of course, is that the price will drop after I buy it (with the worst case scenario being if the price goes to 0). 

SELL: You are exchanging shares in your account for money. If you sell all of the shares you already own, you are ‘closing your position.’

For example, if my AAPL shares are trading at $100 and I don’t think they’ll go up any further, or I want some cash now, I can sell my shares.

SHORT SELL: When you short sell, you have a short position, betting that the value of the security you don’t own will fall. You are selling borrowed securities you do not own. Profit in a short position is the difference between the price at which you short sell and the price at which you cover (buy back) your position. 

For example, if AAPL shares are trading at $100 and I think the price will fall, I can short sell AAPL even if I don’t own any shares. I’d get $100 per share I short, without having to own the shares in the first place. But it doesn’t end there. I also have to return these shares. So if the share price drops to $50, and I don’t think it will go much lower, I can buy them at that price and return them to whoever lent them to me. Therefore, I make $50 per share by shorting (100-50).  

The big risk with shorting is that if the price goes up (the worst case scenario being an infinite price increase), there's no limit to the amount of money you could lose. For example, if the price rose to $200, I’d have to buy the shares to give back to the lender at that price, losing $100 per share (200-100). The price could theoretically continue to rise to an infinite amount, at which point I'd lose ∞ - $100, which, regardless of the price I shorted at, will equal ∞. 

COVER: When you cover, you are buying shares to pay back, or ‘cover,’ your short sell.  

See ‘short sell’ example above for more context, but when you cover a short, you’d ideally want to buy a security at the lowest possible price to ‘close your position.’    

      

STEP 2:  Choose Order Type

 

After deciding on action, you must decide on the ORDER TYPE. You can choose a market, limit, stop, or stop limit order.

MARKET: the order will be executed at the first market price available after placing the order. 

When you’d use this type of order: you want to fill your order as soon as possible, you have a good sense of what price you’ll be filled at, but you’re not picky about getting filled at a super specific price. 

The risk: the risk here is that the market could move and your order could be filled at a price higher or lower than what you were looking for.

LIMIT: the order will only be filled if the price reaches the limit price or a) for sells and short sells: a price that is greater than the limit, b) for buys and covers: a price that is less than the limit. 

When you’d use this type of order: you want to fill your order only if the price reaches a certain point or better, you don’t care about waiting, and you’re willing to risk not getting your order filled at all.

The risk: the risk ehre is that if the market never gets to where your limit price is, even if it’s only cents away, the order won’t be ever be filled and you could miss out on a buying or selling opportunity at a price that was acceptable to you. For example, if you have a buy limit order at $50, and the market price reaches $50.01, your order won’t be filled.  

STOP: The order will be triggered at the stop price and filled at the next available market price. In other words, the order becomes a market order after the stop price is reached. Like with any market order, this does not guarantee that the order will be filled at the stop price.   

When you’d use this type of order: you don’t want to constantly monitor the price of a security and once the market reaches a certain price, you want to fill your order as soon as possible, you have a good sense of what price you’ll be filled at, but you’re not picky about getting filled at a super specific price. 

The risk: the market never reaches the stop price so the order is never triggered (only a negative if the market reaches an acceptable level to you but not quite the stop price); once the order is triggered, the market could move and your order could be filled at a price higher or lower than what you were looking for.

STOP LIMIT: the order will be triggered at the stop price and become a limit order. 

When you’d use this type of order: you don’t want to constantly monitor the price of a security and once the market reaches a certain price, you want to fill your order only if the price reaches a certain point or better, you don’t care about waiting, and you’re willing to risk not getting your order filled at all.

The risk: the market never reaches the stop price so the order is never triggered (only a negative if the market reaches an acceptable level to you but not quite the stop price); once the order is triggered, if the market never gets to where your limit price is, even if it’s only cents away, the order won’t be ever be filled and you could miss out on a buying or selling opportunity at a price that was acceptable to you. 

    

STEP 3: Establish Constraints

Once you’ve selected your desired order type, you must establish its CONSTRAINTS:

STOP PRICE: the price at which the market order (if stop order) or limit order (if stop limit order) will be triggered. 

Note: this is not necessarily the price that the order will be executed at.

LIMIT PRICE: the minimum (or maximum) price at which the order can be filled. For a sell order, the limit represents the minimum price at which an order can be filled. For a buy order, the limit represents the maximum price at which an order can be filled. 

    

STEP 4:  Decide on Quantity

After deciding on the order’s action and type, you must decide on QUANTITY.

QUANTITY:  the number of shares, contracts, bonds, etc. you wish to buy, sell, short sell, or cover. 

Note: you may not enter a number greater than the number of specific shares/bonds/contracts that exist in the market. For short sells, you may not transact a dollar amount greater than 50% of your portfolio size. 

    

STEP 5: Choose Expiration

Now it is time to decide on the order’s EXPIRATION:

GOOD TIL DAY: the order is active until the market’s close. 

GOOD TIL CANCEL: the order is active until you cancel it (30 days max). 

GOOD TIL DATE: the order is active until the market’s close of the date indicated in the order (30 days max). 

Note: If a Good Til Day order is placed after market hours, it will be active until the market’s close of the next available trading day.            

STEP 6:  Review Your Order and Execute!

 

Make sure that everything is set up exactly as you intended. Once you're ready, EXECUTE!

Why is price/total estimated?

There is no guarantee that your order will be filled at the current price. If the order is a market order, then it will be filled at the next available market price, which may be different from the current price. If the order is a limit order, then the order will only be filled on the condition that the market price reaches the limit price or a better price, which may be different from the limit price.  

What is accrued interest and why is it added to the quoted price of the bond?

When a bond is bought or sold on the secondary market, it is often done between coupon payments. For this reason, the seller will be entitled to the portion of the interest (or coupon) for the time they have held the bond before the next payment date. 

For example, if you sell a bond that has a 10% coupon and the last coupon payment was 5 days ago, you are entitled to 5 days worth of accrued interest. 

This means that the buyer will pay you this accrued interest on top of the quoted price of the bond. On the flip side, if you are the buyer of the bond, you must pay the seller the portion of the coupon that they are entitled to when you purchase the bond. As a buyer, you will later receive the full coupon payment at the coupon payment date.NOTE: Accrued interest doesn't impact an investor's return.If a buyer pays a portion of accrued interest when they buy the bond, they will receive the full coupon at the next payment date. This means that a buyer will receive the interest for the time they have held the bond.Similarly, if a seller sells before the coupon date, they will receive accrued interest and will not receive the next coupon payment. This means that the buyer will receive the interest for the time they held the bond before selling it. 

In sum, both buyers and sellers will receive the interest they are entitled to, determined by the amount of time they owned the bond for.

How is accrued interest calculated?

For corporate bonds, accrued interest calculations assume that there are 30 days in every month and 12 months in a year, so the number of days since the last coupon payment are divided by 360 (government bonds use 365 or 366 days, depending on the year). 

In this case, we'd calculate the accrued interest for 5 days, so 5/360, which equals approximately .0138. The, we'd multiply this number by $100 (given that a 10% coupon paid out annually translates to a payment of $100 per bond). The dollar value of the accrued interest, then, would be $1.38, which is added to the quoted price, also called the clean price, of the bond.

How did we do?

How to set-up your team

Which government bonds can I trade?

Contact