A contingency order is a buy or sell order that is executed from a broker's trading platform only when specific, trader-defined conditions have been met. These prerequisite conditions range in scope and depth.
A simple example of a contingency order is a limit order to buy or sell a security at a specified price or better. A more complex contingency order, known as a conditional order, might specify buying a defensive stock when the S&P 500 Index falls below a certain price.
Conditional orders can involve even more complex criteria. For example, a trader can make the purchase of an option dependent on two or more variables, such as the price of the underlying stock and the price of the option contract itself. The number and complexity of conditions to the order is limited only by the broker's platform and the trader's imagination.
In a broad sense, any order that uses a specific condition to trigger its execution could be considered a contingency order. Under that definition, any order other than a market order would be considered a contingency order. However, most brokerage platforms refer to contingency orders as something that has a more complex, or even a conditional, execution.
Perhaps the simplest form of a contingency order is a limit order. This specifies that an order will only be executed at (or better than) a specified price. For a buy limit order, this will represent a pre-determined minimum price, and for a sell limit order a pre-determined maximum. Actual orders may be filled at a price more favorable than the specified limit, but never worse.
A stop-loss order can also be viewed as a contingency order, because it does not become a market order until the price of the security being sold reaches a predetermined level. A stop loss is very useful when applied to options trading, as well as establishing exit points in stock positions during a bear market. Other modifications to stop loss orders include the trailing stop.
An all or none (AON) order is one that executes contingent on getting the full order size executed at once. If a trader wants to buy 10,000 shares of Company XYZ all or none, then they would refuse an execution of anything less than the full 10,000 shares.
An immediate or cancel (IOC) order is contingent upon being executed immediately. If an order cannot be filled in whole or in part within a very short period of time, the order is canceled. Say a trader wants to buy 10,000 shares of Company XYZ for a limit price of $20 and specified immediate or cancel. If there are only 2,500 shares on offer at $20, other sellers will have to come in. But since it is designated IOC, only the 2,500 shares may end up trading.
A fill or kill (FOK) order is one that combines all or none and immediate or cancel. In the example above, the order would only be executed if all 10,000 shares could be filled in a very short period of time.