What is an Alternative Order?
An alternative order is a group of limit orders linked together within a brokerage account. If one order is executed, all other linked orders are automatically canceled.
How Does an Alternative Order Work?
Sometimes called an "either-or" order or a "one-cancels-all" order, an alternative order essentially gives an investor the choice to buy one out of a number of different stocks for the best price in the shortest amount of time.
If an order is partially filled, the remaining orders will be reduced proportionately to the remaining quantity of the unfilled order. If the customer cancels an order before the execution, all orders will be canceled. If the system cancels or rejects the order, the remaining orders will not automatically be canceled.
This trading strategy is best illustrated with an example.
Let's assume an investor wants to invest $10,000 in the market, but he wants to buy stock in only one of three companies. He knows the circumstances under which he wants to buy each company (the "trigger condition”). He places an alternative order with the following trigger conditions:
a) Limit Order 1 - Company X is trading at $40. The investor places a limit order to buy Company X if it drops to $35.
b) Limit Order 2 - Company Y is trading at $42. The investor places a limit order to buy Company Y if it drops to $38.
c) Limit Order 3 - Company Z is trading at $45. The investor places a limit order to buy Company Z if it drops to $40.
Company X and Y hold steady, but Company Z drops to $40 and triggers Limit Order 3. The limit order for Company Z is executed and automatically cancels the limit orders for Company X and Company Y.
Why Does an Alternative Order Matter?
Alternative orders allow investors flexibility to bet on their informed hunches, while curtailing their exposure. They can make a dynamic bet on the market, simultaneously playing several angles, with a floor as to how much they can lose.
This type of order is more complex than a normal order, and not all brokerages accept alternative orders. Even when brokerages do, the procedures, rules and terms may vary. Check with your brokers for the specific details before placing an alternative order.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.