Securities: Equity Market Order Types

Types of Orders

Market Orders

Market orders are when you want to buy or sell something right away.

Imagine you want to buy a toy from a store. You go to the store and ask the shopkeeper for the price. The shopkeeper tells you the toy costs $10. If you say you want to buy it "right away," you will pay $10 and get the toy immediately. And if you want to sell a toy you already have, the shopkeeper will buy it from you for $10.

But sometimes, it can be a bit more complicated. The shopkeeper might only have a certain number of toys at that price. If you want to buy more toys than that, you might have to pay a little more for the extra ones. For example, if they have only 5 toys at that price, but you want to buy 7 toys, you might have to pay a bit higher price for the last 2 toys.

Also, sometimes someone else might buy the toys before you, so you might have to pay a different price. And sometimes, the price can change even before you make your decision.

Price-Contingent Orders

Price-contingent orders are when you want to buy or sell something at a specific price.

Let's say you want to buy a toy, but only if the price goes down to a certain level. You can tell the shopkeeper to give you the toy if the price is at or below that price. This is called a "special price" order.

On the other hand, if you already have a toy and you want to sell it when the price goes up to a certain level, you can tell the shopkeeper to buy it from you then. This is called a "special selling" order.

There are many people who give these kinds of orders, and all of them are kept in a list. The best orders are at the top of the list, where people offer to buy at the highest price and sell at the lowest price.

But sometimes, the orders at the top of the list are only for a small number of toys. So, if you want to buy or sell a lot of toys, you might end up paying a higher price or getting a lower price than the ones at the top of the list.

Stop Orders

Stop orders are similar to special price orders, but they only get executed if something specific happens.

For example, if you have a toy and you don't want to lose more money if the price goes down, you can tell the shopkeeper to sell the toy if the price falls below a certain level. It's like stopping any more losses from happening.

Similarly, if you want to buy a toy when the price goes up to a certain level, you can tell the shopkeeper to give it to you then. These kinds of trades are often done when you borrow toys from the shopkeeper and sell them first, hoping to buy them back at a lower price later.

This article takes inspiration from a lesson found in FIN 4504 at the University of Florida.