Contingent orders are investment orders that are structured of two or more steps that must occur in a specified sequence. Until the first step in the process is completed, the broker is not authorized to move on to the second step in the sequence. The contingent order helps to ensure that certain conditions must take place before an investor engages in the purchase or sale of various stocks and other forms of securities.
One of the most common structures for a contingent order will include two sub-orders involving the purchase and sale of a stock or security. For example, an investor may submit an order to the broker that specifies that a certain stock is not to be purchased until a different stock in the investor portfolio can be sold at a specified price per share. The broker will hold on to the order and not attempt to initiate the sale of the incumbent stock until it achieves a certain price. Upon successfully selling the stock under the conditions specified by the investor, the broker is free to move on to the second portion of the contingent order and purchase shares of the stock named in the order by the investor.
Sometimes referred to as a net order, a contingent order always involves at least two steps, but may include more if needed to achieve the desired effect. An investor may choose to issue a contingent order to the broker as part of a long term plan to acquire certain stock options without investing additional funds into the portfolio. At the same time, the purpose for the contingency order may be to take advantage of short-term conditions within the market, allowing the investor to get in and get out of a given stock in a manner that creates a financial advantage.
It is easiest to think of the basic structure of a contingent order as being a simple “if this happens, do this” approach. Certain events must take place before the final process in the order can be invoked, if the desired effect is to take place. Once the conditions are favorable, the broker moves on to the remaining steps in the process and the order is considered complete and fully executed.
