By placing an order, investors are essentially instructing their brokerage to execute the trade on their behalf. Orders are the fundamental building blocks of any securities market. Once an order is placed, it must go through the process of execution. It’s important to have a clear understanding of how this procedure works before placing any trades.

Buying an asset in the stock market is somewhat similar to buying a real-world product. You can purchase an item from a retailer at the sticker price. If you prefer, you can bargain a price and refuse to sign the deal unless the retailer agrees to your valuations. A similar concept applies to the financial markets.

Traders have different strategies when it comes to trading stocks, Forex, cryptocurrencies, and more. As a result, they may use different types of orders when buying or selling the securities they are interested in. The most common types are limit orders and market orders.

Making the wrong purchase or sale at the wrong time could cost you a lot. The fluctuation in stock prices makes it crucial for new investors to know how to distinguish between limit orders and market orders. So, in this article, we will get acquainted with the two types of orders and learn how they differ and which one is better to use in a certain situation.

What is a Market Order?

Among the most common types of orders when buying or selling financial instruments is a market order. When you place this kind of order, your broker will execute the trade at the current market price. Market orders are the simplest way to trade assets and are often used by beginner investors.

Market orders are all about timing. It is possible that your trade price will vary when it is executed compared to when you submitted your order. As a result, you could end up paying more than you intended for an instrument, or it is also possible that you will sell the security for a lower price.

Most investments don’t fluctuate much over a short period of time, so everyday traders don’t need to worry about it. In some situations, however, even a few seconds can make a significant difference in prices, especially in certain stocks or when volatility is at its height, such as during the 2021 Reddit-fueled GameStop madness.

What are the steps an investor needs to take to place a market order? What is the best time to do this?

Placing a market order is relatively straightforward, as you simply need to select the market order type and enter the necessary details of the trade. In most cases, market orders will be the default option if you are not given a choice. After that, input the number of assets you’re buying or selling.

In most cases, you don’t have to specify a timeframe for placing your market order since it goes through regardless of price. Except for securities with very little trading volume, your order should be processed during the same session (or the following one if it is after hours).

Whenever a market order is placed, there is always the possibility that market conditions may change between the time the broker receives the order and when the trade is executed. There can be a significant problem with large orders, as they take longer to fill and could potentially move the market.

As a result, it’s important to be aware of the potential risks involved when placing market orders. Maybe it will be better to consider other options if you’re concerned about market volatility.

What is a Limit Order?

A limit order will ensure that your trade is executed at a specific price or better. When investors place a limit order, they indicate the maximum purchase price they are willing to pay for a security or the minimum selling price they are willing to accept. This type of order allows investors to have more control over the prices at which their trades are executed.

Let us say you are concerned about the potential price of a particular stock that has a current market price, for example, of $100. Putting a limit order of $102 would mean that the trade will only execute if the price is $102 or less. In any other case, the broker would not make the purchase. Suppose you were interested in selling an asset. A limit order set at $98 guarantees that you can sell if the market price moves $98 or above.

Having said that, let’s learn more about how to place a limit order, and when it might be optimal to use it.

If you want to place a limit order, you will need to select the “limit order” option on your trading platform. In the next step, you will need to enter your limit price and how many shares you want to purchase or sell. Limit orders also allow you to select the duration of your trade since your trade may not go through immediately if the price exceeds your limit.

The “Day Only” option lets you specify that your order is only considered for the current trading day. However, if your order is not filled by the end of the session, it will be canceled. Keep this in mind when placing your order, and make sure that you are comfortable with the possibility of it not going through.

If you want to keep your order open indefinitely, you can do so by setting a Good-Til-Canceled (GTC) order. With a GTC order, you can cancel the order at any time. However, if you do not cancel the order, it will automatically expire after 60 days. Before submitting your GTC order, you will be notified of the expiration date.

Comparison of Market Orders and Limit Orders

Now that we know what a market order and a limit order are, let’s take a closer look at their main differences.

Speed vs. Price

Typically, market orders are executed immediately at the current price. A limit order, however, specifies a minimum or maximum price investor is willing to pay; once the price level is reached, the order is executed. Consequently, market orders are ideal for investors seeking to buy or sell securities as soon as possible, while limit orders may be more suitable for those content with waiting for the right price.

Risk of Slippage

When placing large market orders, there is always the risk of price slippage due to the time it takes to execute the order. Limit orders do not have this problem, as the price is fixed in advance. But, if there’s not enough liquidity in the stock, the limit order cannot be filled even if the target price is reached.

Time of Execution

There is no delay in the execution of market orders, with the speed of execution being more important than the price itself. Limit orders, on the other hand, are executed only at a specific price or better – meaning that if the security’s value is outside of the limit order’s parameters, the trade will not go through.

Out-of-hours Trade Orders

If you place a market order after the market has closed, it will be filled at the current market price and opened at the same price the next trading day. Limit orders that are placed during non-market hours will be entered into a queue and will be processed as soon as the market reopens.

Fees

Typically, limit orders incur a higher brokerage fee than market orders because limit orders are technically more complicated to execute.

What is The Best Order to Use?

If you’re looking to trade a stock with high liquidity, a market order may be the right choice. On the other hand, if you’re trading an asset that is thinly traded, volatile, or has a wide bid-ask spread, a limit order can be beneficial. Keep in mind that limit orders don’t guarantee your order will be filled, but they can help you get a better price.

Limit Orders and Market Orders: Advantages and Disadvantages

Now let’s talk about the benefits and drawbacks of each order type.

Market Order Advantages

• When you place a market order, you can be sure that your trade will go through. This is because market orders are filled right away at the current price. This means that you don’t have to worry about a change in the price of the security before your order is filled.

• If you’re placing a market order, you can rest assured that you’ll only be paying one trading fee. This is because market orders are generally executed all at once. On the other hand, limit orders may take multiple transactions to fill, which means you could end up paying more in fees. Although it is worth mentioning that most brokers today do not charge trading fees, so this may not be as important as it was in the past.

• If you’re looking to trade security quickly, a market order is usually the best way to go. Since there is typically a large number of shares available on the market, the price of the security isn’t likely to fluctuate too much in a short period of time. This means that the price you see when you first place your order is usually pretty close to the price you’ll actually trade at.

Market Order Disadvantages

• Market orders offer a high convenience, but it comes at a price. Because market orders are executed at the current market value, you may end up paying more or receiving less than you expected. Because of this, you have limited control over the price, which can impact your investment strategy.

• Investing comes with a certain amount of risk, and one of the risks associated with market orders is that prices can swing widely. This is especially true for investments that have less trading volume and fewer shares on the market. Even in cases where there are more shares available, market events can cause extreme price fluctuations. It is possible to lose much more than you planned if you place a market order during these periods.

Limit Order Advantages

• Limit orders offer investors a high degree of control over their trades. By setting a maximum or minimum price, limit orders help shield investors from sharp price movements. This can be extremely beneficial in volatile markets.

• A great thing about limit orders is that you can place them for future deals. It allows you to automate the execution of orders whenever a target price occurs in the future, so you don’t need just to use them for today’s trades. The strategy is particularly useful if you anticipate that the market may reach your desired level at some point, but you are not certain when this will happen.

Limit Order Disadvantages

• The execution of limit orders is not guaranteed. Limit orders are bound by the price at the time of placing them, so you cannot be certain whether they will be executed at all. It is possible that the level you specified for a certain asset will never be reached.

• If you’re trying to sell shares at a minimum price, there’s a chance only part of your order will go through if the price dips below that point. This can be avoided by placing restrictions on your limit order, such as “all or none” or “fill or kill,” but this increases the chances of your trade not happening at all.

If you place a limit order, you may end up paying extra fees if your broker has to fill your order in multiple transactions. This is because you will be charged a trading fee each time your broker executes a trade on your behalf. If you would like to avoid this, make sure you select a brokerage that offers low trading fees. By doing so, you can ensure that your limit order doesn’t end up costing you more than it should.

Bottom Line

In market orders, the price of the security is secondary to the speed of completing the trade. Limit orders, on the other hand, deal primarily with the price. So, if the security’s value is currently resting outside of the parameters set in the limit order, the transaction does not occur. It is often found that limit orders may be an effective way to manage the trading activity of an investor by automating the buys and sells according to the user’s desired price range.

Thus, when deciding whether to use a market order or a limit order, investors must carefully consider their own goals and market conditions. While limit orders may provide a price cushion, they can also be costly. In contrast, market orders are easy to execute but may be less favorable in volatile market conditions. Ultimately, the best decision depends on the individual’s needs and circumstances.