Types of Orders when Trading Shares & Derivative Products

When acquiring shares or trading in derivative contracts through execution only share trading platforms, there are a number of different types of share trade order that can be used. An ‘order’ is simply a request to acquire/dispose shares or open/close positions when trading derivative products.

Not all order types are available across all platforms. Similarly, the length of time that specific order types can remain in place also varies between platforms. For example, one may only allow limit orders to remain in place during the current trading session whilst another may let them run for 90 days. It is therefore important to understand how the various orders work on the specific trading platform you are using.

Types of share trade orders when buying/selling shares

The below types of share order are common both among platforms offering standard share trading and those offering derivative products. For example, Hargreaves Lansdown offers each of these types of trade.

Limit order

With a limit order, you are able to specify a maximum price to acquire a share (‘buy limit order’) or minimum price to sell a share (‘sell limit order’). The purpose of a limit order is to stop investors from acquiring or disposing of shares at prices they are uncomfortable with. A limit order you place will not be processed if the price you have requested is not available.

For example, lets imagine you place a £3.00 buy limit order for 1,000 BP shares when the shares are trading at £3.05. This means that if at any point the share price reduces to £3.00 or below, the order will execute. However, if the share price remains above £3.00, the buy limit order will not execute.

A sell limit order would work in the same way. If a £3.10 sell limit order is placed for 1,000 BP shares when the shares are trading at £3.05, the order will execute if the share price rises to £3.10 or above. However, if the share price remains below £3.10, the sell limit order will not execute.

Market order

With a market order, you acquire or sell shares at the current market price. Unlike a limit order where you can set the worst possible buying or selling price, investors using market orders hit ‘buy’ or ‘sell’ based on the current share price but then have no control over the price ultimately accepted. The price obtained will be the best price available in the market at the time the trade is executed.

Given the speed at which share prices can move, market orders therefore present a risk to investors. This is because heavily traded shares may have multiple trades taking place at any one time. If there are other high speed trades executed prior to yours, the price you see when you click ‘buy’ or ‘sell’ using a market order may not necessarily be the price you get.

Market orders are typically processed on the same day as you are accepting the acquisition or sale of shares at the best market price, whatever that is. However, if the full trade does not execute (e.g. due to volume availability at market close) then some brokers will allow the order to carry over to the next trading session.

Stop-loss order

A stop-loss order (also simply known as a ‘stop order’ or ‘close at loss order’) is designed to limit the potential losses an investor could incur when holding a position in a particular company or instrument. If the price hits the absolute stop-loss price, a trade will be executed to buy or sell the position.

Investors using stop-loss orders must be aware they do not guarantee the maximum level of loss. For example, let’s imagine you hold 1,000 shares in a company at an average share price of £10 and set a stop-loss order at £8. If the company publishes a terrible set of results and the price immediately falls to £6, the stop-loss limit will execute at £6 to minimise the loss. It would not have been possible to execute at the £8 level as no willing buyers existed at that price. The stop-loss order guarantees an execution to minimise losses, but not the price you set.

The same logic would apply when using the stop-loss function to trade derivative products. For example, let’s imagine you acquire 100 CFDs of Imperial Brands at £15.00 and you place a stop-loss order at £14.50. If the sell rate of Imperial Brands decreases to £14.50, the stop-loss would be triggered and the order will be executed to close your position. However, if the sell rate suddenly drops to £14.00 (i.e. if the market moves quickly and there were no willing buyers at £14.50), the order would be executed at the lower level to minimise losses.

Whilst stop-loss orders are most commonly used for long positions (where investors benefit when prices rise), they can also be used to close out short positions (where investors benefit when prices fall). When a stop-loss order is used by an investor holding a short position, a buy order is executed when the stop-loss buy price is hit, effectively closing out the short.

When trading derivative products, some platforms offer ‘guaranteed stop orders’ which do provide a guarantee over the maximum level of loss (for a price). Refer to the ‘guaranteed stop orders’ section below.

Types of orders when trading derivative products

The other types of orders listed below are commonly available when buying/selling derivative products (but not when buying/selling shares). For example, Plus500 offers each of these types of trade.

Stop-limit Order

A stop-limit order (or ‘close at profit order’) combines the features of both a stop-loss order and a limit order and is designed to protect your trading profit. With a stop-limit order, the limit order only kicks in once a share hits the stop-limit price. However, unlike a stop-loss order, a trade will only be executed if it can be done at a price which surpasses the price set. A stop-limit order can be used to close out both long and short positions, and can be placed in combination with a stop-loss order.

For example, let’s imagine you buy 100 CFDs of Imperial Brands at £15.00. You place a stop-limit order at £15.50. If the sell rate of Imperial Brands increases to £15.50, the stop is triggered and the order will be executed. However, if the sell rate increases to a rate higher than £15.50, the order will be executed at the higher rate driving a higher profit. If the sell rate does not reach the £15.50 level, no trade would be executed.

Using another example, let’s imagine you sell 100 CFDs of Imperial Brands at £15.00. You place a stop-limit order at £14.50. If the buy rate of Imperial Brands decreases to £14.50, the stop is triggered and the order will be executed. However, if the buy rate decreases to a rate lower than £14.50, the order will be executed at that lower rate driving a higher profit. If the buy rate does not drop to £14.50, no trade would be executed.

Trailing stop-loss order

Trailing stop-loss orders (sometimes also referred to as ‘trailing stop orders’ or ‘tracking stop orders’) function similarly to stop-loss orders. However, rather than setting an absolute stop price, the trailing stop-loss is set at a predefined distance from the current market price. This order type enables investors to maintain a position whilst the price is moving in the right direction but close the trade when the price moves by a certain number of PIPS in the wrong direction.

For example, lets imagine you are trading Oil Futures where one point is 1 USD and therefore 1 PIP is $0.01. If you buy oil futures at $11.05 and set a trailing stop-loss order of 100 PIPS, this means that the sell rate immediately fell to $10.05 then the stop-loss would be executed. However, the stop-loss price tracks the price of the instrument. For example, if the price of oil futures rose to $12.00, the trailing stop-loss would rise with it to $11.00.

Trailing stop-loss orders can be used to close out both long and short positions.

Guaranteed stop order

When markets are volatile, it is possible that stop-loss orders may not be fulfilled at the rate requested because no other party is willing to trade at that price. This means that investors are unable to guarantee their maximum level of loss using a stop-loss feature. Some platforms therefore offer ‘guaranteed stop orders’ which force your position to close even if the market price moves beyond your requested price.

In offering this feature, the investment platform is effectively accepting the risk associated with the trade. As a result, this feature is not available across all instruments and an additional fee is charged to compensate for the additional risk. For example, Plus500 charges for guaranteed stop orders via a wider spread (example below).

Plus 500 example charges for guaranteed stop orders:

Imagine we are trading crude oil futures on Plus 500 (ticker symbol CL) and the buy/sell rates are $11.05/$11.00. You buy a contract for 1,000 barrels of oil and set up a guaranteed stop order at $10.50 which incurs a wider spread charge of $0.105. To setup this guaranteed stop order, you would incur a charge of $105 (1,000 barrels * $.105).

If the sell rate of oil futures drops to $10.20, the position would be closed at $10.50 as a result of using the guaranteed stop order feature.

  • P&L with Guaranteed Stop = ($10.50 – $11.05)*1,000 – $105 = Loss of $550.
  • P&L without Guaranteed Stop = ($10.20 – $11.05)*1000 = Loss of $955.

If the market moved in the other direction and your position became profitable, using a guaranteed stop order would simply mean that your profit would be reduced by the $105 wider spread charge. It can therefore be useful to think of this feature as an insurance against significant volatility.

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