Order Types & Trade Execution
Market, limit, and stop orders — and the failure mode that catches most beginners.
Market vs. Limit Orders
A market order says "fill me immediately at whatever the current price is." You are guaranteed to get filled, but not guaranteed a price.
A limit order says "only fill me at this price or better." You are guaranteed a price (or better), but not guaranteed to get filled at all — if the market never reaches your limit, the order just sits open.
Stop-Loss and Stop-Limit Orders
A stop-loss order sits dormant until the price touches your trigger, then it converts into a market order to get you out as fast as possible.
A stop-limit order also triggers at your stop price, but converts into a limit order instead of a market order — you set a floor on the price you'll accept, at the cost of a guaranteed fill.
Rare but important
Beginners often assume a stop-loss at $45 means "I will sell at $45." It doesn't — it means "once the price touches $45, sell at whatever the next available price is." In a fast-moving or illiquid stock, especially overnight or around news, price can gap straight through your stop with no trades in between, and your market-stop order fills far below where you expected. This is exactly what happens in flash crashes: a wave of stop-losses triggers at once, each one filling at a progressively worse price than the last.
Worked Example
Problem: You hold a stock at $50 and set a stop-loss at $45 to cap your downside. Overnight, the company reports bad news and the stock opens the next morning at $38 — there is no trading between $50 and $38. What actually happens with (a) a market stop-loss at $45, and (b) a stop-limit at $45 with a limit of $44?
- (a) Market stop-loss: it triggers the instant the price drops through $45, but since the stock is already at $38 by the time trading resumes, your order fills near $38 — far worse than the $45 you were expecting.
- (b) Stop-limit at $45/limit $44: it also triggers, but will only fill at $44 or better. Since the stock opened at $38 (below your $44 floor), the order does not fill at all — you are still holding the stock, now down even further, waiting for it to climb back above $44.
- Neither tool protects you from a gap. A market stop guarantees you're out, at an unpredictable price. A stop-limit guarantees your price, with no guarantee you'll actually get out. Choose based on which risk scares you more.