Types of Equity Orders:
Whether contacting the Trading Department to enter an Equity Order or entering an order through Fidelity Wealthscape or Pershing NetX360, it is important to request the order type that is best for the customer and market conditions at that time. To help understand the types of orders available, listed below is an explanation of the types of orders that can be placed and how they affect execution.
This order will typically assure you and your client of an execution, but not a specific price. When a market order is required, it can be filled at whatever price is available when the order reaches its execution point. Be advised: In a volatile market, this can be substantially different from the price that was quoted.
A limit order is an order to buy or sell a stock with a price restriction. A buy limit sets the maximum price the client is willing to pay, and a sell limit sets the minimum price at which the client is willing to sell. A Limit order allows a specific price to be set but does not guarantee an execution. For example, a client may wish to purchase a stock that is currently quoted at 25 bid, 25 ¼ ask, but does not want to pay more than $24. If a limit order is placed at $24 the order will only be filled if the price drops to $24 or lower and there are no orders ahead of your client´s. If the security continues to trade at its current quote, the client will not receive an execution.
A stop order is an order designed to protect a profit or guard against loss. Although it does not work well in all conditions, it can be an effective strategy in certain situations. When placing a stop order, you specify a stop price that, when reached, converts the order to a market order. For example, the client may have purchased a stock at $30 and it is now trading at $50. If it drops to $40, the client wants to sell the stock. You can place a sell stop order at $40, and if the stock trades there or below, your order becomes a market order to sell. The risk with this type of order is that once triggered*, the order can be filled at any price because it is a market order. In this example, if a stop order is in place before the market opens, and the stock opens at $20, the order will be triggered and executed far below the original stop price.
STOP LIMIT ORDER
A stop limit order is a variation on the stop order. It works in a similar fashion in that it is triggered once the stock hits the stop price, but instead of becoming a market order, it becomes a limit order at a price that is selected. For example, if a client wants to limit losses on a stock that was purchased at $50, you can enter a sell stop limit order at “$40 Stop $39 Limit.” Once the stock trades at $40 or below, the order becomes a limit order to sell at $39. This will ensure that the client does not sell at an extremely low price if a stock opens drastically lower. However, the client may still own the stock since the order was unable to be executed.
Each of the above orders has its pros and cons. You should pick the order that best suits your customer and the situation considering current market conditions.
*Triggered means the limit falls above or below the bid or ask. This does not mean it has to trade at your limit price.