A contingent order enables you to place an order into the market ‘only if’ certain conditions are met. For example, an investor that wants to buy a set of shares and offload another set at the same time (a buy-write) would place a contingent order.
These types of orders can be difficult to pull off due to the dependency of one order’s execution on another event happening. It regularly happens that the second order cannot be placed because the first order is not executed.
A contingent order may contain several sub-orders, not just two. If two conditions have to be met for the order to go through, it’s aptly named a ‘multi-contingent’ order.
Contingent orders can be used as part of a long term investment strategy to acquire your favourite stocks without having to add more funds; for instance, poorly performing stocks are sold off in order to raise the funds needed to buy more promising stock picks.
As a short-term strategy, the contingent order enable traders to move quickly by dropping a stock in favour of another.
The basic principle for understanding this order is “if X happens, do Y”.