Market Order

By far the most common type of order, a market order will buy (or sell) a stock at whatever price it is trading at when your order reaches the exchange.  And therein lies the danger.

A market order has no guarantee associated with it, meaning no matter what the bid, ask, or even last price is when you submit a trade, your actual fill price could be drastically different.  This is why a market order should only be used when trading a liquid stock with a very tight bid/ask spread, or if you are building a longer-term position at different price levels.

Limit Order

If a stock starts to move and you want to buy it, but only up to a certain price, you can put a limit order in with your maximum price (the limit).

For example, XYZ is trading at $25.00 and is moving up rapidly.  At most you are only willing to pay $25.50 for it.  You can submit a limit order for $25.50 and it will act as a market order, buying shares at the current market price until either your position is filled or price hits $25.51.  

Another way a limit order can be used is to catch a stock when it retraces from a strong move up.

Let's say XYZ ran from $20.00 to $25.00 and you want to buy it on a pullback, but not for more than $22.50.  You would submit an order at $22.50, and as the stock comes back in it would execute a trade if it gets to your limit price, but not if it stays above it.

Stop Order

Most people think of a stop order as something they put in to protect their existing positions. You have XYZ in your portfolio, which is trading at $25.00, and you want to sell it if it gets to $22.50, so you put in a stop sell order at that price.

 However, a stop order can also be used to initiate a position.

A stop buy order is useful when you think a stock is going to break out and want to make sure to catch it when it does.

If XYZ is trading at $24.75, and you think it will really run if it breaks $25.00, you can set a stop buy order at $25.05, which will only execute if price touches that level.

Stop Limit Order

This type of order can be used in a similar way as the stop order, buying a stock when it breaks out, but in the case of a stop limit order you can set a limited range in which you want to buy.

If we take the previous example of of XYZ breaking out at $25.00, you could set a stop limit buy at $25.05/$25.15, which would mean your order would trigger at $25.05 and create a limit order of $25.15, a price you would not pay more than.

A stop limit sell order can also be used on an existing position to guard against short term price spikes often triggered by high frequency trading.

And of course all these types of orders can be reversed when shorting a stock.

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