Why Order Types Matter During Market Volatility

Global stock markets have been on a wild ride ever since the U.S. unveiled a series of reciprocal tariffs that hit almost every country – including its biggest trading partners – and this has left many investors feeling anxious. At times like this, it’s natural to look for ways to regain control of your portfolio. Making small tweaks to the way you place trades could give you greater control over the prices you accept when buying and selling stocks, no matter what the markets are doing.

Market vs. limit orders

A market order can be beneficial if you want to buy or sell immediately at the best prices available, while limit orders allow you to set parameters for price and time. Market orders prioritize speed of execution, while limit orders prioritize price to help investors avoid unexpected transactions in volatile or thinly traded markets.

Some traders prefer market orders for stable, frequently traded stocks – also described as securities with more liquidity – where price changes aren’t a major concern. Limit orders tend to be more useful for stocks experiencing greater volatility and/or less liquidity.

When you buy or sell a stock and place a market order, your trade will be executed at the best available ask prices if you are buying, and the best available bid prices if you are selling. Electronic systems, and in some cases professional traders that work at the brokerage’s trading desk, attempt to fill market orders quickly to avoid price slippage, but because prices can change from moment to moment, the final price for a stock could be higher or lower than what you might have expected.

For example, let’s say the stock of XYZ Corp. is trading a bid of $49.95 and an ask of $50. If you place a market order to buy, you’ll likely pay $50 – paying the spread (or difference) of $0.05 to complete the trade quickly and efficiency before potentially big shifts take place.

When there’s volatility, the price of stocks are changing rapidly and there is a higher chance that your trade will be executed at a different price than what you may have expected. During these times you may want to consider placing a limit order. A limit order allows you to control the maximum price you’re willing to pay when buying a stock or the minimum price you want to sell it for. If you’re buying using this type of order, your trade will only execute if the share price is at or below the price you set. Likewise, when you’re selling, orders will only be completed if the price is at or higher than the one you set.

If you decide to change your limit price or time frame, you can modify your order on the Order Status page, if it hasn’t already been filled.

Limit order examples:

Buying: Say you want to buy shares of ABC Inc., which last traded at $100, but prefer to purchase it at a lower price and you’re not in a rush. A limit order would allow you to set the maximum price you're willing to pay – say $90 – and choose a cut-off date (also known as a good through date) up to 90 days in the future. If the price doesn’t hit that number by the time specified, the order expires.

Selling: Say you bought shares of ABC Inc. for $90 and want to sell when it reaches $110. You set your limit price at $110 and choose your “good through” date, meaning that if ABC rises to $110 or more within that timeframe, your order will be filled if there are enough willing buyers at the other end of the transaction.

Stop-orders

Stop orders, sometimes referred to as stop-loss orders, share similarities with both limit and market orders. Lika a limit order, you can place an order to buy or sell a security once it reaches a specified price, known as the stop price. The key difference, though, is that once the share price meets your set stop price, it will be triggered and executed like a market order, buying or selling at the best available price.

For a sell stop order, that means your order could get filled at the stop price or below. If the price is falling rapidly, there is a chance the actual sale price could be significantly below your stop price. For a buy stop order, that means you could get filled at the stop price or above. If the price rises rapidly, there is a chance the purchase price could be significantly above your stop price.

For instance, let’s say you bought a stock at $40 and wish to limit your potential loss. You place a sell stop order with a stop price of  $36 (10% lower than the price you bought it at), valid for a certain number of days. At the end of the day, the stock closes at $39. But, the next morning, the stock trades at $35 at the opening bell. Your stop order is triggered and your shares are sold at $35 which is $1 below your set stop price of $36.

That said, stop orders can help remove some of the emotions that come with seeing stocks decline and can lessen the pressure to constantly monitor your portfolio, since they trigger automatically. Selling shares this way may help limit additional loss one would have if the price continued to fall, though it could also exaggerate the loss in a fast moving market. To avoid the risk of a stop order executing at an unexpected price, one might consider placing a stop-limit order.

Stop-limit Orders

Stop-limit orders are similar to stop orders but give you more control over the execution price. Like a stop order, it is only triggered when the stock reaches your specified stop price - the key difference is that when you place a stop-limit order, you set two prices: The stop price which triggers the order, and the limit price, which sets the minimum (for sell) and maximum (for buys) you’re willing to accept. Once the stop price is reached, the order is triggered and will attempt to execute at the limit price or better.

But if the stock price drops quickly below both your stop and limit prices during the day, or if the stock opens the next day below your limit, your order may not be executed. In this case, your order will remain open and you will hold on to your shares until it gets filled or expires. 

For example, let’s say a stock is trading at $50 and you want to sell if the price starts to drop – but only if it remains above a certain price. You set a stop-limit order with a stop price of $48 and a limit price of $47. That creates a $1 band. If the stock falls to $48, the order is triggered and becomes a limit order. It will attempt to sell your shares – but only if the price stays $47 or higher. If the stock plummets quickly and skips past your limit, say to $46.50, the order won’t fill. You’ve avoided selling below you desired price, but at the cost of holding onto your shares at a lower value. 

You can also use a stop-limit order to buy. A stop-limit buy order is useful if you want to buy a stock only after it rises to a certain price – but you don’t want to pay more than a specific amount.

Let’s say a stock is trading at $50 and you believe a breakout past $52 could signal further gains. You might place a stop-limit buy order with a stop price of $52 and a limit price on $53. If the stock hits $52 the order will trigger, and attempt to buy the stock. If the price jumps straight to $54, your order won’t be filled.