Market Order vs Limit Order: Key Differences

There are differences when it comes to market orders vs limit orders. A market order lets you put in an order that is executed at the current trading price. Limit orders on the other hand allow you to set a limit at which the order is executed. You can use both types of orders to execute the same trade, or depending on your goals you can choose what is best suited for a particular situation.

What is a market order?

A market order is used when you want fast execution. When you place the order, it will be executed at the price it is trading at that moment. Given that you are accepting the current price, these orders tend to be executed faster than limit orders. 

Once you place the order, your broker will receive the information, and proceed to buy it or sell it on your behalf. A market order is much more likely to go through then a limit order. Simply because with the limit order you are setting a specific price, and the market order is already accepting the current price. The main advantage of using market orders is the fast execution.

Advantages of using a market order 

The main advantage of using a market order, is the fact that the execution is very fast. In fact, if you want to purchase a security right away, the best way to do it is through a market order. A market order is also much more likely to be filled right away as opposed to limit orders.

Disadvantages of using a market order 

When you place a market order there might be a slight delay, between your broker receiving the order and processing it. During these few seconds, the stock price might fluctuate. This means that although you have entered the market order at a certain price, it might have fluctuated during the execution. This is not particularly worrisome in highly traded securities, but the same does not apply to illiquid securities.

It is important to mention that in illiquid securities it is always wise to use a limit order. Some investors use market orders to trade illiquid securities, and that can be a sure way to lose a lot of money. This is because on the other end of the order, might be someone placing a limit order with a price far higher or lower than the current trading price.

What is a limit order?

A limit order lets you choose a limit price at which the order is executed. Although the execution is far slower than market orders, it allows investors to decide at which price the order is executed. This is by far the best type of order to use, because it allows you to choose a target price at which you will sell or buy a given security.

Once you place the order, your broker will try to find buyers or sellers of that security at those prices. This is extremely useful if you want to buy a particular security at a specific price. Most of the time, the price fluctuations allow for slight changes in price. If a stock is trading at a certain level, it might go slightly lower or higher. With a limit order you can take advantage of this.

Advantages of using a limit order 

Despite the execution taking more time, limit orders have several advantages. Since you can set a limit price, limit orders give investors more control over their entry and exit points. Another important aspect is that you can easily place orders when the market is closed. Let’s say that you have researched a specific stock, and you want to buy it at a particular price. You can place an ongoing limit order for that stock at that price. If the stock reaches those levels, your order will get filled. This is extremely useful for some investors that are looking to pay a particular price for a certain security.

Disadvantages of using a limit order 

The main disadvantage of limit orders is that the execution usually takes more time. This can be a disadvantage for some investors who like their orders filled quickly. There is also another aspect, which is the filling. 

Since you set up a limit at which you will sell or buy a particular security, the order might not be completely filled at a certain price. This is what is commonly referred to as a partial fill. Let’s imagine you want to buy 1000 shares of a certain stock at a $10 limit. If someone wants to sell the same stock at $10, but only wants to sell 500 shares, your order will be partially filled. This means you will buy those 500 shares, but you have to wait until someone else wants to sell another 500 shares at the $10 limit price.

What can influence an order execution?

Order execution is always dependent on the type of order, and a few factors. If we compare the execution on market order vs limit order, market order has the fastest execution. The availability of a specific security could influence the execution. The time at which you place the order can also influence execution. Lastly the size of the order, combined with the overall liquidity of that particular security should also be taken into consideration.

Bottom line 

As we have seen there are several advantages and disadvantages of using market order vs limit order. In general we recommend using limit orders, as you can always set a limit order to the current market price. In a sense you can use a limit order as a market order. If you really want the fastest execution you can always use a market order. Although we would advise to use only in highly traded securities that have a lot of volume. You should also make sure that the volume of your order is appropriate for the daily volume of that security.

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