Market Order Vs Limit Order: Buying & Selling
Before trading, it's important to understand both market orders and limit orders, and how they differ from each other. Both are basic types of orders for stocks, but there are key differences between a market order and a limit order.
A market order is the most basic type of order because it's simply an order to buy or sell a security immediately at whatever the best possible transaction price is. Meanwhile, a limit order sets a maximum or minimum limit on how much an investor is willing to buy or sell the security for. Limit orders guarantee a trade price at least as good as was specified, although trade execution isn't guaranteed.
How a Market Order Works
Investors set on buying or selling a particular stock near the current market price tend to use market orders. Those who want to buy or sell enter a market order with their broker, and the broker executes the order as soon as possible.
However, there is always a chance that the price will change between the time the order is received and the time it is executed. Also, larger orders can take longer to fill and can move the market due to their size.
The benefits of a market order are its simplicity and the fact that execution is almost certain. However, there is no guarantee that the investor will receive the market price at the time they place their market order.
How a Limit Order Works
Investors who want to dictate a maximum buy price or minimum sell price tend to use limit orders. When an investor places a limit order, they tell the broker to buy or sell a particular stock at a certain price or better. The order is executed only if the transaction can be processed at the limit set in the order.
The primary benefit of a limit order is ensuring that the stock is bought or sold at a certain price or better. However, the risk is that the order will never be executed because the price may never reach the limit set in the order.
Tip: A market order guarantees execution (usually), and will be transacted at the best possible price in the market at a given time. A limit order doesn't guarantee execution, but if the transaction occurs it will happen at the price specified in the order, or better.
Market Order vs. Limit Order: Trading Strategy
A market buy order and a limit buy order are both orders to buy, but the limit order specifies a maximum price that a stock can be purchased for. A limit buy order will only be completed if the price is at or below the limit set in the order.
Investors might want to consider a limit buy order if they want to specify a price that's quite different from where the stock is trading at currently or if they want to trade a stock with a large bid-ask spread. On the other hand, investors might want to use a market buy order if they want to buy a particular stock quickly no matter what the price is.
In the case of a market sell vs. a limit sell order, investors may prefer to use a market order if they're trading a stock that has a narrow bid-ask spread. The market rate for transactions on a specific security won't usually change much between the time a market order is placed and the time it is executed. On the other hand, investors often prefer limit sell orders if they're trying to sell an illiquid stock or a large position.
Important: When placing limit orders, it's possible that only a portion of your desired order size is completed at the desired limit price. This is called a 'partial fill'. A partial fill can occur if the trading price for a security only briefly reaches the limit price specified, and then moves away from that level.
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