Order Types and Execution Instructions for CFA Level I

Every order has three parts: the security and quantity, an execution instruction (how and at what price to trade), and a validity instruction (how long the order stays alive). Exam questions test whether you can match a trader's goal to the right combination.

A market order trades immediately at the best available price. It gives certainty of execution but not of price. In a thin or fast market you can get a poor fill. A limit order sets the worst price you accept: a buy limit executes at the limit price or lower, a sell limit at the limit price or higher. It gives price control but no certainty of execution. A limit order is marketable if it could execute immediately against existing orders. Otherwise it rests in the order book and waits.

A stop order (stop-loss) is dormant until the market trades at the stop price. It then becomes a market order. A sell stop sits below the current price and limits losses on a long position. A buy stop sits above the current price and is used to limit losses on a short position or to enter on a breakout. A stop-limit order becomes a limit order, not a market order, when triggered. It protects the price but may never fill if the market gaps past the limit. The key contrast: stop converts to market (execution likely, price uncertain); stop-limit converts to limit (price controlled, execution uncertain).

Validity instructions include day orders (expire at the end of the trading day, the usual default), good-till-cancelled (GTC) (stay active until filled or cancelled, often with a broker-set maximum period), market-on-close orders (trade at the close), and at-the-open orders. Two instructions demand immediate action. Immediate-or-cancel (IOC) executes whatever it can at once and cancels the unfilled remainder, so a partial fill is allowed. Fill-or-kill (FOK) requires the whole quantity to execute immediately, otherwise the order is cancelled. Other instructions include all-or-nothing (full size, but not necessarily immediately) and hidden orders or iceberg orders, which show only part of the size.

Orders are matched by order-matching rules. The common one is price priority, then time precedence: the best-priced orders execute first (highest bid, lowest ask), and among equal prices the earliest order goes first. Some markets also give priority to display over hidden size. Trade prices are set in different ways: in a continuous market trades occur whenever orders match; in a call market orders are batched and one price clears them. Execution mechanisms can be order-driven (book of orders), quote-driven (dealers quote), or brokered. A short sale means borrowing shares through a broker, selling them, and later buying them back to return them. A short sale order may be a market or limit order. Many markets restrict it with an uptick rule or locate requirement.

Use the same sequence for any order question. It keeps you from mixing up trigger prices, limit prices and validity.