Clicking "buy" feels instantaneous. You enter an amount, confirm the order, and shares appear in your account. The simplicity is deceptive.
Between your click and the completed trade lies a system of order types, matching engines, and execution rules that determine what you actually pay and whether you get what you expected. Most of the time, this works smoothly. Occasionally, it does not, and the investor who understands how orders work is better positioned to avoid surprises.
This article explains the main order types, how execution works, and the common mistakes that lead to unexpected outcomes.
This is general educational information, not personal financial advice.
The Mechanics of a Trade#
When you place an order to buy shares, you are not buying directly from a company. You are buying from another investor who wants to sell. The stock exchange (in Australia, the ASX) operates a matching engine that pairs buy orders with sell orders.
The price you see quoted for a share is actually two prices:
- Bid price. The highest price a buyer is currently willing to pay.
- Ask price (or offer price). The lowest price a seller is currently willing to accept.
The difference between these is the bid-ask spread. If the bid is $10.00 and the ask is $10.05, the spread is $0.05.
When you place a market order to buy, you typically pay the ask price (or higher, if the market moves). When you place a market order to sell, you receive the bid price (or lower). The spread is an implicit cost of trading.
Understanding this structure is the first step to understanding why the price you see is not always the price you get.
Market Orders#
A market order is the simplest type: buy or sell at the current market price, as quickly as possible.
How It Works#
When you submit a market buy order, it matches against the best available sell orders in the order book. If you want to buy 100 shares and there are 100 shares offered at $10.05, you pay $10.05. If there are only 50 shares at $10.05 and the next 50 are at $10.10, you pay a blended price.
Market orders prioritise speed and certainty of execution over price. You will get your shares (or sell your shares), but you may not get the exact price you expected.
When Market Orders Work Well#
- Highly liquid securities with tight spreads (major ETFs, large-cap stocks)
- Situations where execution is more important than price precision
- When the bid-ask spread is narrow and stable
When Market Orders Create Problems#
- Illiquid securities with wide spreads or thin order books
- Fast-moving markets where prices are changing rapidly
- Large orders relative to available liquidity
In these situations, market orders can result in "slippage": paying significantly more (or receiving significantly less) than the quoted price at the time you placed the order.
Limit Orders#
A limit order specifies the maximum price you are willing to pay (for a buy) or the minimum price you are willing to accept (for a sell).
How It Works#
If you place a limit buy order for 100 shares at $10.00, the order will only execute if shares are available at $10.00 or less. If the current ask price is $10.05, your order will sit in the order book, waiting. It may fill later if the price drops, or it may never fill at all.
Limit orders prioritise price control over certainty of execution. You know the worst price you will get, but you may not get any execution.
When Limit Orders Work Well#
- When you have a specific price in mind and are willing to wait
- Illiquid securities where market orders risk poor execution
- Volatile markets where prices are moving quickly
- Large orders that might move the market if executed all at once
When Limit Orders Create Problems#
- When the limit is set unrealistically and the order never fills
- When missing an execution matters more than the price difference
- Fast-moving situations where waiting means missing the opportunity entirely
Limit orders require judgment about what price is reasonable. Setting a limit too tight means frequent non-execution. Setting it too loose defeats the purpose.
Other Order Types#
Beyond market and limit orders, brokers may offer additional order types. Not all brokers support all types, and execution rules can vary.
Stop Orders (Stop-Loss)#
A stop order becomes a market order when a specified price is reached. A stop-loss order to sell is triggered when the price falls to a certain level, intended to limit losses.
For example: you own shares currently trading at $50. You set a stop-loss at $45. If the price drops to $45, your stop order becomes a market order to sell.
The risk: in a fast-falling market, by the time the stop triggers and the market order executes, the price may have fallen further. You might sell at $42, not $45. Stop orders do not guarantee a specific exit price.
Stop-Limit Orders#
A stop-limit order becomes a limit order (not a market order) when triggered. This provides more price control but introduces the risk that the order does not fill if the price moves through your limit.
Good Till Cancelled (GTC)#
A GTC order remains active until it executes or you cancel it, rather than expiring at the end of the trading day. This is useful for limit orders that may take time to fill.
Day Orders#
A day order expires at the end of the trading session if not filled. This is the default for many brokers.
Common Execution Mistakes#
Understanding order types is necessary but not sufficient. The following mistakes occur even when investors understand the mechanics.
Mistake 1: Using Market Orders in Illiquid Securities#
An investor wants to buy shares in a small company. They place a market order for 500 shares. The order book shows 100 shares at $2.00, then 200 shares at $2.20, then 200 shares at $2.50.
The market order sweeps through the order book, buying 100 at $2.00, 200 at $2.20, and 200 at $2.50. The average price is $2.24, not the $2.00 they saw quoted.
For illiquid securities, limit orders provide protection against unexpectedly poor fills.
Mistake 2: Setting Unrealistic Limits#
An investor wants to buy an ETF trading at $100.05. They set a limit order at $99.50, hoping to get a "bargain." The price never drops to $99.50. The order sits unfilled for weeks.
Meanwhile, the ETF rises to $105. The investor missed the opportunity by trying to save $0.55.
Limit orders work best when set at realistic levels, not as wishful thinking.
Mistake 3: Placing Orders Outside Market Hours#
Orders placed when the market is closed will execute at the next open. The opening price can be significantly different from the previous close, especially after news events or overnight moves in international markets.
A market order placed Friday evening and executing Monday morning could fill at a very different price than expected. Limit orders provide protection, but may not fill if the market gaps through the limit.
Mistake 4: Ignoring the Spread#
An investor buys shares at $10.05 (the ask) and immediately decides to sell. The bid is $10.00. They sell for $10.00, losing $0.05 per share without the price having "moved" at all.
The spread is a transaction cost. Buying and selling frequently, especially in securities with wide spreads, erodes returns.
Mistake 5: Assuming Stop-Losses Guarantee Exit Prices#
An investor sets a stop-loss at $45, believing they have limited their downside to that level. The stock gaps down overnight due to bad news, opening at $38. The stop triggers, and the market order fills at $38.
Stop orders provide a trigger, not a guarantee. In gap-down scenarios, the execution price can be far worse than the stop price.
Mistake 6: Overcomplicating with Exotic Order Types#
Some investors layer conditional orders, brackets, and triggers in complex configurations. Each additional layer introduces the possibility of unexpected behaviour or execution failures.
For most investors, market orders (for liquid securities) and limit orders (for everything else) cover the vast majority of needs. Simplicity reduces errors.
Practical Principles#
Rather than memorising order types, focus on principles:
Match order type to liquidity. Liquid securities can tolerate market orders. Illiquid securities need limit orders.
Know what you are paying. The quoted price is not the transaction price. Understand the bid-ask spread before trading.
Consider timing. Orders at market open or during high volatility are more likely to experience unexpected fills.
Start simple. Market and limit orders handle most situations. Add complexity only when there is a clear reason.
Review before confirming. Many brokers show an estimated fill price or order summary before execution. Use it.
Accept that perfect execution is impossible. Prices move. Spreads exist. The goal is to minimise friction, not eliminate it.
The Bigger Picture#
Order execution is a detail. It matters, but it is not where outcomes are determined.
An investor who understands order types but trades excessively will underperform one who uses market orders for everything but trades rarely. The mechanics of execution are worth learning, but they are a small part of the investing equation.
The purpose of understanding orders is to avoid preventable mistakes: slippage in illiquid securities, missed opportunities from unrealistic limits, surprises from stop orders in gapping markets. These mistakes are avoidable with basic knowledge.
Beyond that, the focus should return to the things that matter more: asset allocation, costs, time horizon, and behaviour.
Summary#
When you place a trade, you interact with an order book where buyers and sellers are matched. Market orders prioritise speed and certainty but may result in unexpected prices, especially in illiquid securities or volatile markets. Limit orders provide price control but may not fill if the limit is unrealistic. Stop orders trigger at a specified price but execute as market orders, with no guarantee of the stop price. Common mistakes include using market orders in illiquid securities, setting unrealistic limits, placing orders outside market hours, ignoring spreads, assuming stop-losses guarantee exit prices, and overcomplicating with exotic order types. For most situations, market orders (for liquid securities) and limit orders (for less liquid ones) are sufficient. Understanding execution reduces preventable errors but is less important than the fundamentals of investing.
Sources#
- ASX. (2024). Order types. https://www2.asx.com.au/investors/learn-about-our-investment-options/shares/order-types
- ASIC MoneySmart. (2024). Buying and selling shares. https://moneysmart.gov.au/how-to-invest/buying-and-selling-shares
- Vanguard. (2023). Understanding trading and order types. https://www.vanguard.com.au/personal/education-centre/en/insights-article/trading-and-order-types