• Numerous order types possible
• Different type of order execution
In order to be able to trade on the stock exchange, you basically need two different trading partners – a buyer and a seller. Depending on the order type specified by the client of the securities trade, a counterpart for the trade offer is found more or less quickly. What is important is the addendum to the order, which ultimately decides on the execution time, volume and the way in which a trading order that has been placed is implemented.
Important information when trading
A securities order that investors communicate to an executive body, usually the custodian bank, must contain some elementary information. First, investors have to determine whether they want to place a buy or sell order and which specific asset should be part of the order. In addition, the volume of the order must be transmitted as well as the stock exchange where the trade is to be executed. In addition, information is required that relates to the validity of the order, as well as the exact order type. All of these factors determine whether and when and in what manner a trade should be completed on the exchange.
Different order types
When deciding on an order type, investors are spoiled for choice. Not every type of securities order is suitable for every type of investor, and different order types can also cover different investor needs at different times. There are less well-known order types on the market, such as the iceberg order, in which market participants can only identify part of an order that is usually quite large. With this type of trade order, the order is filled in chunks and only a fraction of the order is visible in the open trading book. The order is therefore not placed on the market all at once in order to avoid strong fluctuations in the respective security. Iceberg orders are often used by institutional investors who want to avoid panic among other market participants in this way.
Also less known are Trailing Stop, Dynabeat or Bracket. While with a trailing stop the stop price at which the share is to be sold is placed below the market price and then adjusted upwards when the market rises, experienced investors use the Dynabeat order type to always be at the top of the order book as a client by adjusting the order limit – within a predetermined range – to the respective best ask or bid price. Bracket orders, on the other hand, serve as a hedging strategy for experienced traders by linking one order to two other orders that have the same volume. The original order is bracketed this way, a buy order is protected by a sell limit order above and a sell stop order below.
While the above order types are primarily suitable for investors with market experience, there are a number of order types that all investors should be familiar with and should be able to use depending on their investment requirements.
Cheapest/best order
One of the well-known buy order types is the “cheapest” order, which is executed at the currently cheapest market price. So if there is a sell request that has the same quantity as specified in the cheapest order and is cheaper than all other orders, this will be accepted and the trade will be executed.
Similar to the cheapest order, the “best” order is executed if a purchase order with the same volume and the best price is available for the specified sell order. In this case, there are no further restrictions on the order, the order will be executed as soon as possible when the above conditions apply.
Market order
With a market order, there is no price comparison, there is no need to search for “cheapest” or “best”. Instead, the respective order is executed immediately if a price has been set and a corresponding trading counterparty, i.e. a purchase or sale offer for the corresponding ordered volume, is available. Market orders are the most commonly used in the market, especially when the orders need to be filled at any price.
Market orders are treated with priority, so the trading order is usually executed. However, investors who place market orders must be aware of the associated risks, because the market price at which the order was placed can deviate significantly from that which was valid at the time the order was placed, particularly in the case of highly volatile assets.
Limit order
Investors who use a limit order have more influence on the price. Here, when placing the order, traders specify the maximum cost of the purchase or the minimum cost of the sale. This prevents investors from having to pay more for their purchase than they would like or getting less for their sale than they had hoped.
However, if the price limits are too strict, the order may expire – namely if no buy or sell offer is received on the market within the predetermined period of time, which may be a maximum of 90 days, that corresponds to the requested volume at the specified price offers.
Stop order
Depending on whether it is a buy or a sell request, stop orders are divided into stop buy and stop sell. Here, the trading order is not executed immediately, rather the investor sets a specific price (stop price) in advance, from which the buy or sell order is triggered.
Traders can bet on price movements in this way, because they themselves determine up to which price they want to enter or exit the market. For example, stop orders can be used to automatically trigger purchases at the next possible price as soon as the price of the investment has fallen. The order is executed “best”, i.e. as quickly as possible.
A stop order can be combined with a limit order in order to limit losses in this way. Stop-limit orders (or stop-loss orders) are also executed as soon as the specified stop price has been reached, but not “cheapest” or “best” but the limit previously defined by the trader is decisive. The order is executed from the stop price on the basis of the limit price. Investors rely on a market trend, i.e. on an upswing or downswing of the share.
investment strategy important
Which order type you choose as an investor depends on your own investment behavior as well as your personal investment goals. These can change over time and differ from investment to investment. For example, if you have a stock in mind that you basically think is worth buying, but which is too expensive at the current price, you would choose a different order type than if you consider a stock to be significantly undervalued after a price drop and want to get the low price level as quickly as possible entry wants to use.
Anyone who submits purchase or sale orders for securities must be clear about their own investment strategy. For inexperienced traders with a long-term investment horizon, it is worth taking a look at the classic order types, while experienced investors can also let other order types work for them.
Investors must also be aware that the market is constantly in motion during the times when prices are quoted, so a 1:1 implementation of the trading order is only possible in the rarest of cases. In view of the fact that stock exchange trading is largely electronic these days, the delays between orders and execution are generally smaller than they were a few years ago.
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