• Buying or Buying to cover
  • Buy Market Order
  • Will buy the stock “ASAP” at the market price
  • The price at which the trade is executed may differ from the market price at the time the order was placed
  • This is because there is a time lag between the time the order is placed and the time it is executed. The market continues to move during this time.
  • Buy Limit Orders
  • Buy limit orders are only executed at or below the limit price.
  • This guarantees that you will pay no more than the limit price.
  • Buy limit order may never be executed if the stock price stays above the limit price.
  • Buy Stop Orders
  • Buy stop orders convert to market orders as soon as the market price is at or above the stop price.
  • The buy stop price should always be above the current market price.
    • If you issue a buy stop order and the stop price is below the current market price, it would immediately become a market order.
    • Of course stop orders are more expensive than market orders.
    • Thus a buy stop price below current market price simply results in an expensive market order.
  • Buy Stop Limit Orders
  • As soon as the market price is at or above the stop price, it converts to a limit order
  • Discussion
  • Typically, buy limit orders are designed for trades that get you into the market, that is buy orders and sell short orders
  • Typically, stop orders are designed to get you out of the market (sell and buy to cover orders). They are typically not intended to execute right away. They are intended to protect you by getting you out of a short position when the market is rising, or out of a short position when the market is falling. The buy stop order would typically be used when buying to cover. It will get you out of a short position before the market gets too high. Less typically, it might also be used to buy if you wanted to “jump on the bandwagon” in a rising market.
  • In a buy stop limit order, the stop price should be above the current market price for the reasons above. The limit price should be above the stop price. You could view it this way: “get me out of my short position if the price reaches X, but protect me against a big jump between order placement and order execution.
  • Of course if your goal is to get out of a short position in a rising market, the buy stop limit order may not be executed if the limit price is exceeded, and you will be stuck short as the market keeps going up and up.

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