Order types: what happens when you press the button
After this lesson you can pick the right order type for entering, exiting and protecting a position, and you'll know the trap hiding inside stop-limits.
Four instructions
Market order — fill me now, at whatever's available. You get the fill for certain, and the price is whatever the book happens to hold (course 2: it takes the ask, and a big enough order walks up it). It's the right tool when getting out matters more than the last few cents.
Limit order — fill me at my price or better. Here you control the price, and what you give up is any guarantee of trading at all, since the stock can run off without you. It's the patient default for entries, because nothing can force you into a worse price than the one you wrote down.
Stop order (stop-market) — once the stock trades at my level, send a market order. It lies dormant until touched. The protective stop that School II builds everything on is this type: once you're wrong, it gets you out at the market's price, whatever that is.
Stop-limit — once it trades at my stop level, send a limit order at my limit price. It sounds safer than a plain stop, so here's the trap worked through. You hold a stock at $40 with a stop-limit: stop $38, limit $37.50. Bad news hits mid-session and price slices through $38 in seconds. The next prints are $37.20, then $36.80, and the stock keeps going. Your limit at $37.50 is now an offer sitting above the market, unfilled. At $31 you're still holding it, because you told the market you'd only sell at $37.50 or better and the market never came back that high. School II uses stop-market orders for protective stops for exactly this reason.
What actually happens when you press Buy
Your order goes to your broker, and the broker routes it, either to an exchange or, very commonly for US retail, to a wholesale market maker who fills it directly. Many "zero commission" brokers are paid by that wholesaler for sending the flow, which is where the "free" comes from, and the EU has banned the practice as of mid-2026. None of this needs to worry you much. A limit order is standing protection against most of what varies in execution quality, because whoever fills you has to do it at your price or better.
Which order for which job
| Job | Tool |
|---|---|
| Enter without chasing | Limit |
| Exit a winner at your price | Limit |
| Get out now | Market |
| Protect a position | Stop-market |
| Protect, but with a price floor | Stop-limit — accepting it may not fill |
Check yourself
- Why is a stop-limit dangerous as your protective stop? (In a fast drop the limit can sit unfilled above the market while the stock keeps falling, and you're still holding.)
- When is a market order the right choice? (When exiting matters more than price — a stop firing, or you simply need out.)
- Your limit buy at 41.90 never fills and the stock runs to 44. What did the limit cost you, and what did it do for you? (You missed the trade. You also never paid more than your written price. School V weighs that trade-off setup by setup.)
The idea this lesson installs
Know what your order becomes when it triggers.
This completes School I. Next: School II — Risk First: the Contract, which opens with the most important arithmetic in trading.