What Is an Order?

What Is an Order?

An order consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor's behalf. An order is the fundamental trading unit of a securities market. Orders are typically placed over the phone or online through a trading platform, although orders may increasingly be placed through automated trading systems and algorithms. Once an order is placed, it follows a process of order execution.

Orders broadly fall into different categories which allow investors to place restrictions on their orders affecting the price and time at which the order can be executed. These conditional order instructions can dictate a particular price level (limit) at which the order must be executed, how long the order can remain in force, or whether an order gets triggered or canceled based on another order, among others.

Understanding Orders

Investors utilize a broker to buy or sell an asset using an order type of their choosing. Once an investor has decided to buy or sell an asset, they initiate an order. The order provides the broker with instructions on how to proceed.

Orders are used to buy and sell stocks, currencies, futures, commodities, options, bonds, and other assets.

Generally, exchanges trade securities through a bid/ask process. This means that to sell there must be a buyer willing to pay the selling price. To buy there must be a seller willing to sell as the buyer's price. Unless a buyer and seller come together at the same price, no transaction occurs.

The bid is the highest advertised price someone is will to pay for an asset, and the ask is the lowest advertised price someone is willing to sell an asset at. The bid and ask are constantly changing, as each bid and offer represents an order. As orders are filled, the levels will change. For example, if there is a bid at 25.25 and another at 25.26, when all the orders at 25.26 have been filled, the next highest bid is 25.25.

This bid/ask process is important to keep in mind when placing an order, as the type of order selected will impact the price the trade is filled at, when it will be filled, or whether it will be filled at all.

Order Types

On most markets, orders are accepted from both individual and institutional investors. Most individuals trade through broker-dealers which require them to place one of many order types when making a trade. Markets facilitate different order types that provide for some investing discretion when planning a trade.

Here are some the basic order types:

The order types used can greatly affect the results of a trade. When trying to buy, for example, placing a buy limit at a lower price than what the asset is trading at currently may give the trader a better price if the asset drops in value (compared to buying now). But putting it too low may mean the price never reaches the limit order, and the trader may miss out if the price moves higher.

One order type isn't better or worse than another. Each order type serves a purpose and will be the prudent choice in different situations.

Example of Using an Order For a Stock Trade

When buying a stock, a trader should consider how they will get in, and how they will get out at both a profit and loss. This means there are potentially three orders that can be placed at the outset of a trade: one to get in, a second to control risk if the price doesn't move as expected (referred to as a stop loss), and another to eventually trade profit if the price does move in the expected direction (called a profit target).

A trader or investor doesn't need to place their exit orders at the same time they enter a trade, but they still should be aware of how they will get out (whether with a profit or loss) and what order types they will use to do it.

Assume a trader wants to buy a stock. Here is one possible configuration they could use for placing their orders to enter the trade as well as control risk and take profit.

They watch a technical indicator for a trade signal and then place a market order to buy the stock at $124.15. The order fills at $124.17. The difference between the market order price and the fill price is called slippage.

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They decide that they don't want to risk more than 7% on the stock, so they place a sell stop order 7% below their entry at $115.48. This is the loss control, or stop loss.

Based on their analysis, they believe they can expect a 21% profit from the trade, which means they expect to make three times their risk. That's a favorable risk/reward ratio. Therefore, they place a sell limit order 21% above their entry price at $150.25. This is their profit target.

One of the sell orders will be reached first, closing out the trade. In this case, the price reaches the sell limit first, resulting in a 21% profit for the trader.