CFA, Finance, FRM

Market Orders vs Limit Orders

When an investor has to place an order to buy or sell a stock, there are two elementary options for its execution that are- Market orders and Limit orders.

 Market Order

  • These orders are very basic and a new trader usually thinks of this order. The Market orders are meant to execute as soon as possible at the present market price of the security.
  • The price of the security in this type of order is secondary to the speed of completion of the trade. In this order a broker receives an order for trading a security, and then that order is taken in action at the current price. There is no guarantee in this type of order that it will actually get settled.

  • The final cost of the order depends on the size of the order, availability of shares in the market and the time when the order is placed.
  • When we place an order online, through an online broker, we will be able to see our available funds and it will calculate the number of shares we can buy or sell at the current, reducing the trading fee from the total.
  • However, there may be the difference in the actual price from the time the order is placed and until the order is completed.

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Who should/can place a market order?

Those who aim to buy or sell shares immediately are recommended to make market orders. This is for the ones who are enhancing their portfolio, because market orders help to make an upward move. This is also preferred by the ones who look on the long-term goals, like building wealth for retirement or adjusting portfolio to match the risk tolerance.

LIMIT ORDERS

  • These type of orders sets the maximum or minimum price limit at which we are willing to buy or sell the security. The prime factor dealt here is the price.
  • So, when the security’s price is currently outside the parameters set in the limit order, the transaction doesn’t happen. The limit orders are divided into limit buy and limit sell.
  • Limit buy is setting a restriction on the amount willing to be paid for a security. Now, the order happens at the moment when the price falls below the top limit. Limit sell is fixing the amount below that is to be accepted for the security in future.
  • The security can be sold only when the price of the share rises above the previously decided limit. Here, we can be sure that we will get the price terms we want before any move is made.

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Who should/can place a limit order?

Limit orders are preferable when the securities are of low volume, very volatile and have a wide difference between bid and ask prices. These orders can be placed by the ones who have more experience with trading.

CONCLUSION

For the new investor, its good to start with market orders and then after becoming known with the technicalities of trading the investor can go for limit orders. Both the market order and the limit order have their own pros and cons but the final choice remains in the hands of the investor.

Though limit orders offer cushion for the limited price range, it can be costly. On the other hand, market orders are easy to execute but can be a dicey choice under volatile market conditions. Limit orders are much more complex to execute than the market orders and therefore can also lead to higher brokerage fees.

Author- Disha Agrawal

About the author: Disha Agrawal is an Economics graduate and presently pursuing MBA with specialization in Financial Administration from Prestige Institute of Management and Research, Indore. She is a keen learner and is intrigued with financial markets. She is committed to her work and strives for continuous improvement.

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