I . What Is Market Order & Limit Order?
When a layperson imagines a typical stock market transaction, they think of market orders. These orders are the most basic buy and sell trades, where a broker receives a security trade order and then processes it at the current market price.
For example, an investor enters an order to purchase 100 shares of a company XYZ Inc. "at the market". Since the investor opts for whatever price XYZ shares are going for, the trade will be filled rather quickly at wherever the current price of that security is at.
Even though market orders offer a greater likelihood of a trade being executed, there is no guarantee that it will actually go through. All stock market transactions are subject to the availability of given stocks and can vary significantly based on the timing, the size of the order, and the liquidity of the stock.
All orders are processed within present priority guidelines. Whenever a market order is placed, there is always the threat of market fluctuations occurring between the time the broker receives the order and the time the trade is executed. This is especially a concern for larger orders, which take longer to fill and, if large enough, can actually move the market on their own. Sometimes the trading of individual stocks may be halted or suspended, too.
It’s also worth bearing in mind that a market order that is placed after trading hours will be filled at the market price on open the next trading day.
Limit orders are designed to give investors more control over the buying and selling prices of their trades. Prior to placing a purchase order, a maximum acceptable purchase price amount must be selected. Minimum acceptable sales prices, meanwhile, are indicated on sales orders.
A limit order offers the advantage of being assured the market entry or exit point is at least as good as the specified price. Limit orders can be of particular benefit when trading in a stock or other asset that is thinly traded, highly volatile, or has a wide bid-ask spread: the difference between the highest price a buyer is willing to pay for an asset in the market and the lowest price a seller is willing to accept.
Placing a limit order puts a ceiling on the amount an investor is willing to pay.
II . Market Order vs. Limit Order: An Overview
When an investor places an order to buy or sell a stock, there are two fundamental execution options:
Place the order "at the market": Market orders are transactions meant to execute as quickly as possible at the current market price.
Place the order "at the limit": Limit orders set the maximum or minimum price at which you are willing to buy or sell.
Buying stock is a bit like buying a car. With a car, you can pay the dealer’s sticker price and get the car. Or you can negotiate a price and refuse to finalize the deal unless the dealer meets your valuation. The stock market works in a similar way.
A market order deals with the execution of the order. In other words, 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.
Market orders are transactions meant to execute as quickly as possible at the current market price.
Limit orders set the maximum or minimum price at which you are willing to complete the transaction, whether it be a buy or sell.
Market orders offer a greater likelihood that an order will go through, but there are no guarantees, as orders are subject to availability.