Order

An order is an instruction to buy or sell an exchange-traded fund (ETF) or stock on a trading venue such as a stock market, or bond market. These instructions can be simple or complicated, and for retail investors are generally sent to a broker. There are some standard instructions for such orders. While the Bogleheads Investment Philosophy does not recommend frequent trading or complex strategies, many investors do buy ETFs as long-term investments. All ETF traders should understand how the market works before buying or selling them.

The least risky way to place an order for an ETF is to match the best current offer by placing a limit order to buy at the current best offer to sell (or vice versa). This is almost equivalent to a market order, which is an offer to buy (or sell) at the best price available at the time the order is placed, but it reduces the risk that you will pay too much if the offer you intended to match disappears before your order is placed.

Caution: This article is a basic introduction to the use of orders for trading. While there are many other ways to place an order, many of them are suitable only for experienced investors who understand the subtle complexities involved. In many cases, the extra complexities result in minimal savings, often at significant risk.

Overview
Investors have several options when it comes to placing an order to buy or sell securities. For example, whether you place an order directly with your broker or trade online, you can instruct your broker to buy or sell at a specified price. Understanding how different types of orders work may make a difference in whether your trade gets executed and at what price.

Unless otherwise stated, orders are placed for one trading day.

A simplified view of the market
The market contains all traders willing to buy or sell the security. If traders are willing to buy and sell at the same price, then a trade will be made. If you want to buy or sell, you add your own order to the market, and it will either be executed immediately or added to the available orders in the market.

Your broker will normally give you information about the market; with an online broker or real-time quote service, you might see a display like this:

The size is in hundreds of shares, so this display says that traders have offered to buy 500 shares of XYZ at $19.98, and to sell 1000 shares at $20.02. The bid/ask spread is four cents.

Market order
A market order is an order to buy or sell a security at the current market price. Unless you specify otherwise, your broker will enter your order as a market order.

The advantage of a market order is that you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers).

The disadvantage is that the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by your broker. This may be especially true in fast-moving markets where prices are more volatile. When you place an order "at the market," particularly for a large number of shares, there is a greater chance you will receive different prices for parts of the order.

Market order example
Refer to the example security shown above. If you place a market order to buy 1000 shares, you will buy them for $20.02 a share if the sell order is still there; your total price is $20,020.

However, the sell order might have been taken by another buyer, or withdrawn by the trader, before your broker processed your order. In that case, you will still buy the shares, but at the next-best price or prices.

If there were 500 shares for sale at $20.04 and 2500 at $20.05, you would buy all the shares at $20.04 and 500 at $20.05, a total price of $20,045.

Limit order
To avoid buying or selling a security at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.

As stated earlier, when you place a market order, you can't control the price at which your order will be filled. But by using a limit order you also protect yourself from buying the security at too high a price.

Reaching the desired price does not automatically guarantee a sale, as every transaction must have both a buyer and seller. When the security hits that price, you get in line with the rest of the people at that price and wait for execution. If there is low volume, you may not get an execution.

A common compromise between the two types of orders is a marketable limit order. This is an order to buy at the current ask, or sell at the current bid. If the ask or bid is still there when your order is placed, it will execute immediately because there are now matched orders to buy and sell at the same price. But if the ask or bid has changed, your marketable limit order remains a limit order at the same price, instead of immediately executing at another price.

Limit order example
Refer to the example security shown above. If you place a limit order to buy 1000 shares at $20.00, you may not buy them at all, but your order will become the new bid.

If someone else places a market order to sell, or a limit order to sell at $20.00, then you will buy the shares and pay $20,000. But if nobody accepts your order, you might find that XYZ has gone up to $21 and you still do not have the shares.

If you place a marketable limit order to buy 1000 shares at $20.02, you will buy the shares for that price if the sell order is still there, just as if you had placed a market order.

But if the sell order is gone, you do not buy at a higher price; rather, your order is added to the market, and may be accepted by another trader at $20.02. You will not buy at a higher price unless you modify your order.

Special types of orders
Most orders are market or limit orders, but there are other conditions you can place on an order. Any additional condition is an additional restriction, beyond the price, which limits whether the order will be executed.

Stop order
A stop order is an order to buy or sell a security once the price reaches a specified price, known as the stop price. . It may be entered as a  market order or a  limit order; the most common stop order is the stop-loss order, which is entered as a market order to sell.

Stop-loss order
A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position.

It does not guarantee a specific price. It means 'sell at any price' if the market price declines below a certain level.

Stop-limit order
A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a  limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price.

Caution must be exercised when choosing the appropriate order.

For example, you purchase a stock and $32 and it rises to $40. To protect against a drop in price, you issue a stop sell market order at $32 (a 20% drop from the current price). The stock drops significantly below $32 and the market order triggers. However, the next available execution is at $27 (or worse!) and realize a 15% loss. Later in the day, the stock (which you no longer have) closes at $36 ($4 over the purchase price).

All-or-none
An all-or-none order will not be executed unless it can be filled in full.

Refer to the example security shown above. If you place a limit order to sell 1000 shares at $19.98, you will sell 500 shares immediately, and your offer to sell the other 500 will become the new ask; it may be filled immediately, filled later, or not be filled at all.

If you place an all-or-none limit order, you will sell nothing unless a trader is willing to buy all 1000 shares. If your order does not fill immediately, another trader could buy the 500 shares at $19.98.

All-or-none orders can be used to avoid additional commissions. In the example above, if the first 500 shares are sold, and then you need to change the price to sell the remaining 500, you will pay a second commission. If you have to wait for the next day to sell the remaining shares at the same price, you will pay a second commission even if your order to sell was valid for multiple days. If a limit order fills on a single day in multiple transactions, you pay only one commission.

The disadvantage is that the market may move away from you and you lose the benefit of a partial execution. If the price drops to $19.88, compare:
 * A partial execution sale will get you $19,930 (minus two commissions) = $9,990 (500 shares @ $19.98) +  $9,940 ( 500 shares @ $19.88)
 * An all-or-none execution sale will get you $19,880 (minus one commission) = $19,880 (1000 shares @ $19.88)

A difference of $50 (minus one commission).

Order risk summary
An order has two risks; it may execute at an undesirable price, or may not execute when you wanted it to.

A summary of orders and associated risks:
 * Limit orders
 * Buy or sell as soon as possible, at a certain price or better
 * Risks not getting executed
 * If a sell order is not executed and price falls, you still have the security after the price drop
 * If a buy order is not executed and price rises, you did not benefit from the rise
 * Market orders
 * Buy or sell as soon as possible at any price
 * Will get executed
 * When selling, risks a big decline in price (incur a large loss)
 * When buying, risks a big increase in price (pay much more than you intended)

Stop order risks
A stop order becomes a market or limit order when it is triggered, so it has all the risks of a market or limit order. If prices are falling rapidly, a stop-loss order may execute well below the stop price for a large loss, while a stop-limit order may not execute at all because there are no buyers above the limit price after the stop.

In addition, there is the risk that the stop price will be reached when you do not want the order to trigger. In a volatile market, a single trade below the stop price will trigger the order.

Exchange-traded funds
When buying or selling ETFs, a  limit order should be used for the transaction. With a limit order you are able to specify the most that you are willing to pay for your shares. Ideally it would be best to buy at the NAV, but that is rarely achievable. With most brokers, there is no additional fee to use a limit versus a market order, and you have some control over the price you pay.

A minimal risk approach
The least risky way to buy an ETF, particularly one with low trading volume, is to place a marketable limit order, an order to buy at the ask. This is almost equivalent to a market order, but reduces the risk if the offer at the ask is withdrawn and the next-lowest offer might be significantly higher.

Refer to the example security shown above. Assume XYZ is an ETF. A trader who was willing to sell at $20.02 withdraws his offer (or has someone else take it first), and places a new offer to sell at $20.03.

In-between the one second interval between the withdrawal of $20.02 and placement of $20.03, a next-best offer appears from someone else at $21.

If you place a limit order to buy 1000 shares at $20.02 during that one second, it will not execute, thereby protecting you from a purchase at the much higher price of $21. The new ask of $20.03 appears next and you modify your order to accept $20.03.

Compare this to a market order to buy 1000 shares. The $21 offer would have been accepted, resulting in a cost of $21,000 rather than $20,030 (a difference of $970).

An alternative approach
An alternative way to buy ETFs is with a day limit order that's in the middle of the bid/ask spread. However, you may not get execution, or you may have to wait a long time for execution. Also, since the price could run away from you as you try to save a couple of dollars; there is an additional risk.

The idea is that you want to purchase below "ask" price, but need to execute the order quickly before the market moves too much.

For example, an investor wished to purchase an ETF which had the following prices (valid only at a single time of day):
 * Bid: 81.37
 * Ask: 81.55

A limit order to buy at 81.45 did not execute. While the investor waited, "ask" moved from 81.55 to 81.68. The limit order was canceled and a new limit order for buy was placed at 81.60, which filled in a few seconds.

Forum discussions

 * How do sell stop loss orders and sell limit orders work?
 * Buy ETFs with Market or Limit Order?

Live examples
Threads containing "live" examples. To understand how orders are used for ETF transactions in real-time.
 * Limit Orders - How do you determine what limit to set?
 * I bought VSS; spread has been consistently very small
 * "My first time" (Buying an ETF that is), contains trading session screen shots