Market orders, limit orders, stop-loss — when do you use each type?

Order types are a practical topic that the CFA exam tests directly. Here's a clear breakdown:

1. Market Order

• Executes immediately at the best available price
• Guarantees execution, NOT price
• Use when: You must get in/out of a position right now

2. Limit Order

• Buy limit: Buy at a specified price or lower
• Sell limit: Sell at a specified price or higher
• Guarantees price, NOT execution (may never fill)
• Use when: You have a target entry/exit price and can wait

3. Stop Order (Stop-Loss)

• Becomes a market order when the stop price is reached
• Buy stop: Triggers when price rises to the stop level
• Sell stop: Triggers when price falls to the stop level
• Use when: You want to limit downside or enter on a breakout

4. Stop-Limit Order

• Becomes a limit order (not market) when the stop price is reached
• Has two prices: stop price (trigger) and limit price (worst acceptable)
• Use when: You want protection but refuse to sell below a certain price

Practical Example:

Olivia owns 500 shares of Meridian Corp at $80. She places a sell stop order at $72.

• If Meridian drops to $72, the stop triggers and her shares are sold at the next available market price (maybe $71.80 in a fast market).
• With a stop-limit at $72 stop / $71 limit, the order triggers at $72 but won't sell below $71. Risk: if the stock gaps from $73 to $69, the order triggers but the limit prevents execution — Olivia is stuck holding.

Exam tip: The CFA exam loves scenarios where a stop-limit order fails to execute because the stock gaps through both the stop and limit prices. Understand this gap risk clearly.

Practice order type questions in our CFA Level I question bank.