Saturday, 28 November 2020

Market Order vs. Limit Order: Here’s What to Use

Market Order vs. Limit Order: Here’s What to Use
28 Nov
4:09

When you start trading stocks, you’ll run into terms such as “market order” and “limit order.” Because trades happen with the help of a broker (online or otherwise), understanding how these types of orders work is important so you know what you’re getting into before you risk your money.

Here’s what you need to know about market orders and limit orders.

Market order vs. limit order: At a glance

Market orders and limit orders are both orders to buy or sell stock — the main difference between the two is in the way the trades are completed. With a market order, you want to complete the trade as quickly as possible and pay the current market price. A limit order is about paying the price you want. You set parameters, and the trade only goes through once your requirements are met.

 

Market order

Limit order

How it’s priced

Current market price

Price parameters you set

How long it takes

As quickly as possible

As long as it takes to reach your price requirement

Cost

Broker’s regular trading charge

Might come with extra fees

There are reasons that a market order might not go through, but typically you can expect your market order to be completed as quickly as possible when the markets are open. With a limit order, there are no guarantees your price requirement will be met, so there’s a higher chance it will go unfilled.

What is a market order?

When most investors think about “trading,” they think about market orders. You send an order for a set number of shares and the broker fulfills the order using the current market price.

If you use an online broker, you’ll be able to see your available funds and calculate how many shares you can buy or sell at the current price, minus any trading fee. However, the actual price might change slightly from the time you place your order until the time it is completed. Some of the things that impact your final cost include:

  • Size of the order
  • Availability of shares
  • Time you place the order

For the most part, if you place an order for stocks traded on a major exchange, there are plenty of shares available for purchase. As long as your order isn’t massive, there shouldn’t be a problem. Most beginning investors place relatively small orders for frequently traded stocks, so market orders are usually settled quickly.

Realize, though, that there are times when trading may be suspended and your market order could go unfilled. These situations are usually rare; they mostly occur when a major event has taken place, such as if market losses become so huge that trading is stopped.

Finally, it’s best to avoid placing a market order when the market is closed. News about the economy or a particular stock can cause after-market movements that impact the price on opening. The difference between the price of a stock at the close of the markets one day and the open of the markets the next day is called a gap.

If you place a market order outside normal trading hours, the order will be executed when the market opens — and a gap could mean that you’re on the hook for a price you weren’t expecting.

Who should place a market order?

Market orders are often recommended for those whose main goal is to buy or sell shares immediately. When you’re building or rebalancing a portfolio, market orders make sense because they allow you to make your move now.

You don’t necessarily need to wait for a specific price because you’re working on long-term goals, like building wealth for retirement or adjusting your portfolio to match your risk tolerance. In fact, if you’ve signed up for an automated investing plan, market orders are going to be regularly used.

What is a limit order?

Rather than buying at the current market price, a limit order allows you to set specific boundaries on what you’re willing to pay or accept for a security. There are two main types of limit orders:

  1. Limit buy: You set a ceiling on the amount you’re willing to pay for a security. Your order isn’t triggered unless the price falls below your top limit.
  2. Limit sell: You set a bottom on the amount you’re willing to accept for a security. You only sell your shares if the price rises above your designated minimum.

With a limit order, you can be reasonably sure you’ll get the price terms you want before you make a move.

However, there are other reasons a limit order could go unfilled. First of all, the price might never reach your parameters, so you don’t end up ever executing your trade. You could end up not buying more shares, or you could end up holding onto shares instead of selling them.

Another concern is that the security might meet your price criteria but there might not be enough liquidity involved to execute the trade. You can reduce that risk by approving a partial fill of your order.

Unlike market orders, limit orders are often placed after hours. With a limit order, it’s possible to use a price gap to your advantage. Realize, though, that limit orders are more complex, so you could end up paying higher brokerage fees, cutting into your profits.

Who should place a limit order?

In many cases, limit orders might make sense when you’re looking at securities that meet one of the following descriptions:

  • Low volume
  • Very volatile
  • Wide difference between bid and ask prices

For the most part, limit orders should be attempted by those who have more experience with trading. It’s also a good idea to understand the asset you’re trading before moving forward.

Market order vs. limit order: Final thoughts

For most investors, it makes sense to start with market orders and become comfortable with the mechanics of trading before trying more complex orders.

In order to increase the chance that your limit order will actually be executed, you need a good feel for how the markets work, and how specific securities respond to market conditions. Placing market orders first, and getting used to trading, can help you develop that sense.

No matter what you choose, though, be sure that you have a long-term plan for investing so that you’re building wealth.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit

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Source: https://www.magnifymoney.com/blog/investing/market-order-vs-limit-order/

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