Market, Limit, and Stop Orders - Risk Considerations
WFA accepts various equity order types from clients, including market orders, limit orders, and stop orders. Following below is a description of how these order types work, including a summary of the associated risk factors.
Market orders are used to buy or sell securities promptly at the best available price. Clients should understand that the last-traded price is not necessarily the price at which their order will be executed and that in fast-moving or illiquid markets, the price at which their order executes could be significantly away from the last-traded price or recent quotations in the security. Clients seeking to avoid execution at a price significantly away from the last-traded price should consider using a limit order, especially during periods of high market volatility or for securities with volatile trading prices.
Limit orders are used to buy or sell securities at a specific price or better and can help protect clients from adverse price movements when entering orders to buy or sell a security. Clients are strongly encouraged to consider using limit orders during periods of high market volatility or for securities with volatile trading prices. Limit orders to buy can only be executed at the limit price or lower, while limit orders to sell can only be executed at the limit price or higher. Limit orders are not guaranteed to execute and will not be executed if the security does not trade at the identified limit price of the order.
A stop order to buy (or sell) becomes a market order to buy (or sell) when a transaction occurs at, or above (below), the client’s stop price and at, or within, the prevailing national best bid or offer (“NBBO”) quotation for the security.
A stop-limit order combines the features of a stop order and a limit order. Stop-limit orders differ from stop orders in that once the stop price has been triggered, the order becomes a limit order, not a market order. Stop-limit orders help protect clients from adverse price movements when entering orders to buy or sell a security, especially during periods of high market volatility, although, once triggered, the limit order will not be executed if the security does not trade at the identified limit price of the order or better.
WFA does not accept stop orders in all securities, including bulletin board and ‘pink sheet’ equities.
Additional risk considerations regarding stop orders are discussed below:
- Stop Prices are not guaranteed execution prices.
- A stop order becomes a market order when a transaction occurs at, or above (below), the client’s stop price and at or within the prevailing national best bid or offer (“NBBO”) quotation.
- Execution venues are required to execute a market order fully and promptly at the current market price.
- The price at which a stop order ultimately is executed may be very different from the client’s stop price.
- While a client may receive a prompt execution of a stop order that becomes a market order, during volatile market conditions the execution may be at a significantly different price from the stop price if the market is moving rapidly.
- Stop Orders may be triggered by a short-lived, dramatic price change.
- During periods of volatile market conditions, the price of a stock can move significantly in a short period of time and trigger an execution of a stop order (and the stock may later resume trading at its prior price level).
- If a stop order is triggered under these circumstances, the security may be traded at an undesirable price even though the price of the stock may stabilize during the same trading day.
- Sell Stop Orders may exacerbate price declines during times of extreme volatility.
- The activation of sell stop orders may add downward price pressure on a security.
- If triggered during a precipitous price decline, a sell stop order also is more likely to result in an execution well below the stop price.
- Placing a Limit Price on a Stop Order may help manage some of these risks.
- A stop order with a limit price (a “stop limit order”) becomes a limit order when a transaction occurs at, or above (below), the client’s stop price and at or within the prevailing national best bid or offer (“NBBO”) quotation. A limit order is an order to buy or sell a security at a specified price or better.
- By using a stop limit order instead of a regular stop order, a client will receive additional certainty with respect to the price received for the stock although there is the possibility that the order will not be executed at all.