Get FREE Loan Quotes From Loan Advisor’s Top Reviewed Licensed Money Lenders in Singapore!     Click here

Get Free Quotes from the Best Licensed Moneylenders!  Click here

Navigating the Stock Market: Limit Order vs. Market Order

limit order vs market order
Table of Contents

A market order is an instruction to buy or sell a stock at the best available market price without regard to the price as quickly as possible. In contrast, a limit order specifies a price or better to trade a stock and execute the deal only when it reaches the target price level.

Market order: You intend to buy shares of Netflix(NFLX) and place a market order of 100 shares. Your broker executes the trade and the stock at the current price of USD 435 a share.

Limit order: You expect the price of Netflix shares to be lower, so instruct the broker to place a limit order of USD 400 a share. Your broker will execute the order when the stock price reaches only USD 400 or lower.

One difference is the pricing. A market order is an available price in the stock market. Contrarily, a limit order is a specified price by an investor.

Another is timing. A market order is likely to be immediately executed because it is an instant trade in the market. However, a trade may occur only when a stock price reaches a level or better specified by an investor. The execution time depends on the match between the specified price and the stock price movements.

Market Order vs. Limit Order

The table below illustrates the main differences between the 2 order types:

Market orderLimit order
Price settingNo price set; Execution at current market price; An investor has no control over a trade price;Instant; An investor accepts a current price when placing an order;He has little control over the pricing;
Execution speedInstant; An investor accepts a current price when placing an order; He has little control over the pricing;Yes; A specified price by an investor; A control over a transaction price; 
Price and execution certaintyAn investor cannot control the price but can ensure a market order will be filled up for a market orderAn investor has control over the pricing but cannot predict a transaction can take place within a time frame as the stock price of a limit order may not match a market one within a period.
ExpirationNot applicable to a market order, as it is an at-the-spot transaction.An expiration applies to a limit order, as the order will close if a limit order is not fulfilled within a period.
SuitabilitySuitable for simple and stable investing stylesSuitable for complicated and volatile investing styles
Bid-Ask spreadThe spread can be significant if a market order is placed in a large volume to find counterparties, particularly thinly traded stocks.A limit order can close the spread if a specified price is close to a bid-ask price in the market. Narrow stock spreads make investors easier in the market.
LiquidityA sizeable lot of market orders can dry up a stock’s liquidity once executed, increasing its volatility.On the contrary, more successful limit orders enhance market fluidity as more limit orders match and stock marketability improves.
CostsYes, trading fees are less than a limit order due to its simplified structures and execution convenience.Yes, trading fees are expensive, as brokers consume more time and utilize more complicated instructions for executing a limit order.

What is a Market Order?

A market order is an order to buy or sell a stock at the current market price,” quoted by the SEC. A market order is an open market order placed by an investor to execute at the prevailing market price. Usually, a broker executes a market order immediately after an investor places a market order.

Pros

  • Ready to execute: A market order prevails over other orders like a limit order. Market orders generate more activity than others in the market due to their execution speeds and certainty, as more buyers and sellers are available for market orders than those of other order types, creating an abundant and primary market for investors.
  • Fast execution: A market order carries out a deal at a market price and the fastest speed, eliminating pricing uncertainties in a volatile market and suiting traders or investors entering or exiting their positions quickly.

Cons

  • Price slippage: One disadvantage of a market order is no control over the price. Though having the benefits of immediate execution of an order, an investor cannot get a price tag on a stock he expected. For example, a stock buyer may overbuy, or a seller may undersell a stock, as he has no say over the price.
  • Market fluctuations: A stock may undergo fluctuations due to a high volume caused by market orders. As the number of shares changing hands increases, stock prices are more volatile. Besides, high transaction volume may suck up the stock liquidity, leaving small investors hard to find buyers or sellers in the market.
  • Execution of market orders on the trading day after hours: You may risk losing if you place a market order on the next trading day after hours. A corporation may announce drastic changes like earning loss or restructuring after trading hours, causing a slide in share prices the next day. It may cost you a lot of money in the next trading session.

Market Order Example

An investor wants to buy 100 shares of Tesla Inc (TSLA) as soon as possible and place a market order with his broker. The broker sends the order to the market, finding a seller of the shares at the current market value of USD 210 per share. The broker executes the trade, and the investor owns 100 shares of Tesla Inc. worth USD 210,000.

In this example, the investor did not know the buying price when he placed the order. He may risk buying high if the stock price slips after purchase. However, a market order makes deals as fast as possible.

limit order

What is a Limit Order?

A limit order is a directive to buy or sell stocks with a specific price or better. An investor has control over the price he will accept or trade. A buy-limit order allows an investor to buy a stock at a limit price or lower. In contrast, a sell-limit order lets a trader sell a stock at a specific limit price or higher. A limit order usually lasts an execution period (typically 30 days.)

Pros

  • Price control: Another benefit is that, with a limit order, you can design the price range of a stock in a fast-moving or volatile market to rationalize your investments. For example, you can capture your investment costs and profits on trading stocks by using limit orders. Limit order investing can avoid price slippage caused by a market order.
  • Reduced execution risk: An investor can use a limit order to avoid an unknown price problem caused by a market order, as only a specified or better price will be executed in a limit order.
  • Thinly traded securities: Investors may benefit from thinly traded securities with wide bid-ask spreads, which is the difference between an asking price a buyer is willing to buy for an asset and the lowest price a seller is willing to sell. A bid-ask spread can be enormous for 2 situations: securities with few transactions or in a tumultuous market.

A limit order ensures a stock must fall to a minimum price before an investor is ready to buy or sell it, thus protecting investors from arbitrary prices like a market order.

Cons

  • No fill-up guarantee: An investor sets a specified limit price for a stock to be executed to get the price for a stock bought. However, a limit order cannot guarantee to fulfill the instruction. As a counterparty for the limit order is unavailable in the market, the order can await on an order book until filled up, expired, or canceled.
  • Stock liquidity: Investors may have difficulty using limit orders to buy or sell stocks when looking for thinly traded shares due to the lack of liquidity. Using a limit buy or sell order may not ease up the problems.
  • Trading costs: Stockbrokers charge higher fees for executing limit orders than market orders due to a limit order’s complexity. Advanced investors tend to use limit orders more than beginners. Novel investors should begin with market orders before employing limit orders to avoid losses at early stages.
  • Missing opportunities: Investors may risk investment opportunities if a limit order is not exercisable due to unavailable counterparties or expiration, losing access to investments, and the chance to profit from stock appreciation.

Limit Order Example

In the earlier market order case, an investor thinks the stock market will fluctuate and places a buy order of 100 shares of Tesla (TSLA) for USD 200 a share, while the share is currently trading for USD 210 a share. 

If the stock falls to USD 200, his stockbroker will fill up the order, regardless of what happens to further price drops. The investor gains provided the stock price rises above USD 200 later. On the contrary, if the stock never drops or rises to USD220 a share, the investor misses the opportunity to gain because the order was not filled up.

Who is a limit order suitable?

You can use a limit order in investing when the market is volatile or a stock is thinly traded with a bid-ask spread. A limit order protects you from abrupt pricing in a hugely swinging market. It assures you of the prices expected from thinly traded stocks. However, investors are guaranteed to fill up a limit order due to demands in the market and are subject to missing opportunities.

Is a Market Order More Suitable than a Limit Order?

A market order is suitable for investors working in a fast-moving market. In contrast, a limit order helps investors pinpoint better pricing in thinly traded investments or a volatile market. Finally, it depends on your investment demands and requirements.

Is A Limit Order More Cost-Effective than a Market Order?

A limit order is a complex instruction involving more effort than a straightforward market order. Therefore, the cost for a limit order is more expensive than a market order. If improperly implemented, a limit order can cost more for investors than a market order.

Where is It Appropriate to Utilize a Limit Order?

Two situations are suitable for a limit order strategy:

  • To ensure an expected pricing in a volatile market
  • To exact an anticipated price on thinly traded stocks.

What does A Stop-Limit Order Entail?

A stop-limit order specifies an additional feature to a limit order besides a minimum price on a stock. In a stop-limit order, an investor adds a price range before buying, such as USD 180 to 190 in the Tesla example, rather than a single-limit price in a limit order.

stop limit order

Final Thought

A limit order specifies a minimum price to buy or sell, and a market price looks for the best available market price for a security. It depends on an investor’s requirements whether to use either investment strategy.

3 Key Takeaways:

  • A limit order specifies a minimum price reached before buying or selling a stock.
  • A market order looks for the best market price and instant execution for a stock.
  • An investor should base his demands and requirements before using a limit or market order.

Loan Advisor provides you with the latest loan quotes, ensuring that you remain well-informed and secure the best financial options available in the market. Click the link today to receive your 3 free quotes!

Table of Contents

Looking For An Urgent Personal Loan?

Submit your details and receive up to 3 loan quotes from best Licensed Money Lenders picked by Loan Advisor
  • Hidden
  • This field is for validation purposes and should be left unchanged.
Looking for a Loan?