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Created on 13.09.2018

Market orders, limit orders, stop orders etc. – these are all order types you ought to be familiar with for stock exchange trading.

If you are looking to trade on the stock exchange (for instance via online trading platforms or advisors), the first thing you should do is familiarize yourself with the basics. This also covers order types that are supported by the stock exchange. They are the cornerstones of buying and selling securities. What order types can you choose from, and which one makes the most sense? You will find the answers to these questions here.

A stock exchange order contains a lot of information: is the investor looking to buy securities or sell them? How many securities are to be bought or sold? How long is the order valid for? And of course: which securities should be bought in which currency, and on what stock market? You also have what is known as a price limit depending on the order, in other words information on whether the order may only be executed under certain conditions. Deciding on whether to opt for a limited order or not depends heavily on the investor’s expectations and goals. But let’s start by keeping things very simple. We are going to outline the four most important order types and their characteristics:

At best orders: buying and selling securities as quickly as possible

“At best orders” (also known as market orders) work like this: as soon as a counterparty emerges, the order is executed at the current market price. There is no market price limit on how much you will pay or receive for a security. This means that, in the case of an at best order, you have no control over the final price of the security. This can become a problem, especially for securities with a low trading volume. This is why it is worth checking the order book before executing the order. At best orders are thus appropriate if the investor wishes to buy or sell their security as quickly as possible.

Example: Simone wants to buy 50 ABC shares, and she wants to do this as quickly as possible. She places an at best order on the stock exchange. If someone is looking to sell at least 50 ABC shares, then the deal is successful. The price Simone pays reflects the current market price. As a result, Simone cannot influence whether she ends up paying either 100 francs or 200 francs for each of these 50 shares.

Limit orders: you protect yourself from selling too cheaply or from paying over the odds.

If you are placing a “limit order”, you set a price limit as well as a time frame for buying or selling the security you are interested in. By doing this, you are protecting yourself from paying more for securities or from selling your securities for less than you would like. It is, however, possible that you are either unable to buy/sell anything, or you are only able to buy/sell some of your securities, in other words you have only achieved “partial execution”. This depends on the trading volume and the limit you have selected.

Example: the current price of ABC shares is 160 francs. Simone would like to buy 50 ABC shares at no more than 150 francs per share. She places a limit order on the stock exchange. As soon as the price of an ABC share falls to 150 francs or below, the order is executed. However, if only 20 ABC shares are available for purchase at this time, Simone receives 20 shares instead of the 50 she was after.

Stop orders: protecting yourself against drops in share prices.

If you choose a “stop order”, you set a certain price (also known as a trigger here) as an investor. If the security you are trying to sell reaches or exceeds this price, your order is executed as an at best order. Stop orders generally only make sense if you are selling because, by executing them, you can protect yourself against a drop in share price or a major, unexpected fall in value.

Example: the current price of ABC shares is 160 francs. Simone expects the price of the share to fall steeply. She places a stop order with a trigger of 150 francs on the stock exchange. As soon as the price of an ABC share falls to 150 francs or below, the sale is made as an at best order. This means Simone receives 150 francs maximum per share, though potentially far less seeing as the order is only executed if there are enough buyers looking to buy at a certain price. By placing a stop order, however, she ensures that her shares are sold at the best possible price before the share price hits rock bottom when she is unable to sell her shares for much money. As such, she no longer needs to keep a constant eye on prices.

Stop-limit orders: no risk of selling too cheaply

Stop limit orders fulfil a similar function to stop orders, albeit only up to a predefined price limit. You also set a specific price beforehand in this instance (the trigger). If the security reaches this value, the order is not actually executed as an at best order. Instead, it is sold at a price that does not exceed a predefined price limit. If the price of the security falls below this limit, the order is deemed to have expired.

Example: the current price of ABC shares is 160 francs. Simone expects the price of the share to fall, but she still wants to sell it for a good price. She places a “stop-limit order” with a trigger of 150 francs and a limit of 140 francs on the stock exchange. As soon as the price of an ABC share falls to 150 francs or below, the sale is made as an at best order. If, however, the price falls below 140 francs, the order is cancelled. This means Simone will in all likelihood receive between 140 and 150 francs per share, and she does not run the risk of being forced to sell her shares at a price that is lower than what she is after. She does, however, run the risk of her order expiring without a single share being sold if the price of the ABC share falls sharply and rapidly. This is why it is advisable to define a sensible buffer between stop and limit.

But that’s not all: in addition to the four order types we have discussed, there is also a whole host of other ways you can buy and sell securities, including more complex models. Make sure you only use these order types if you know exactly what expectations you have of the market, and if you know exactly what effect a certain order type has.

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