When buying or selling stock, the type of order you place matters because it impacts the timing and price of your trades. The two most common orders are market orders and limit orders. Each type has its advantages and drawbacks and is ideal in certain situations. The more you understand how each order type works, the more control you have over the outcome of your trades.
Before you open a brokerage account, find out about the order options. While most platforms support market and limit orders, some place restrictions on things like extended-hours trading.
What is a market order?
A market order is an order to buy or sell a stock at the best available price when the order is placed. The main advantage of a market order is that it enables the broker to execute the trade immediately, especially for highly liquid stocks. The ideal time to place a market order is when your priority is quick execution over getting the best price.
The biggest drawback to placing a market order is that you can’t guarantee the price. In other words, your trade price could be higher or lower than what’s listed in your brokerage account. It’s not too big of a deal if you’re only buying a few shares, but if you’re placing a large order during a volatile market, after market hours, or are buying or selling a thinly traded stock, the price you pay may vary significantly.
Market order example
Sarah wants to buy 100 shares of Company XYZ, a publicly traded tech company. She logs into her brokerage account, looks up the stock symbol and selects the “Buy” button. From the dropdown box that appears, she chooses “Market Order.”
Since it’s a market order, Sarah’s trade will be executed immediately at the best available price. At the time of her order, the company’s shares are trading at $75. Sarah’s order is filled instantly, and she successfully buys 100 shares for $75 each, costing her $7,500. Because Sarah’s brokerage offers commission-free stock trades, there are no applicable fees.
What is a limit order?
A limit order is an order to buy or sell a stock at a specific price or a better price. If you purchase a stock, you set a buy limit, which is the maximum price you are willing to pay. If you are selling, you put a sell limit — the lowest price you are willing to sell at.
Most limit orders allow you to set a time limit, after which the order will expire if your price is not met. Depending on the broker’s policies, you may be able to set the limit order to expire at the end of the trading day or a later date. Keep in mind not all brokers provide this option.
Limit orders offer some advantages over market orders. They provide greater control over transaction prices if you don’t need your trade executed immediately.
For example, if you expect a stock to drop in value in the month ahead, you can set a limit order to buy the stock at a price you’re comfortable with. If your prediction proves accurate, the trade will be executed when the stock reaches your limit order price.
Limit orders are ideal when trading volatile or thinly traded stocks or large blocks of stocks, where a market order could result in a significant gap between the bid/ask price and the price you end up paying. This is especially true if you’re trading large blocks of stock. Finally, limit orders are often used for after-hours or premarket trading when market orders can’t be executed.
Of course, limit orders provide no guarantee of execution if your price isn’t met.
If your priority is to own the stock, and you’re flexible on price, a market order may be more suitable.
There is also a risk of partial fills, which can happen when an entire order can’t be filled in a single trade. This could result in multiple trades being executed to fill your order, which may result in higher trading fees if you pay a commission.
Limit order example
Following the example above, after a couple of months, Sarah decides to purchase additional shares in Company XYZ. The shares are now trading at $70, but, while Sarah believes it’s still an excellent long-term investment, she only wants to purchase the stock if the price drops to $65 per share.
To do this, she places a limit buy order with a limit price of $65. She sets an expiry date of 30 days. Here’s what it means:
- If the stock price drops to $65 before the 30-day order expiry, Sarah will purchase the shares at $65 or the best available price below $65. She will not pay any more than $65 per share.
- If the stock does not fall to $65 within 30 days, Sarah’s limit order will expire, and the trade will not be filled.
Market order vs. limit order: Key differences
Both market and limit orders can be the better choice depending on the situation. Here’s a side-by-side comparison of their different features and characteristics:
How to choose the right order for your trading goals
Confused about whether a market or limit order is more suitable? Here are some things to consider before you place your trade:
Summary
Market and limit orders will be sufficient for most traders when buying or selling. Market orders offer quick trades but don’t guarantee the price you will receive. They also cannot be executed after-hours or during premarket trading. Limit orders provide price control, but you may have to wait for your trade to be executed — in fact, your trade might not be placed at all.
Additionally, you’ll want to consider the stock you’re trading. A limit order is likely your best option to take advantage of predicted price swings. A market order should suffice if you want to own a stable stock for the long term.
Ultimately, it’s about having options, which is why investing with an online brokerage that offers a wide range of investment tools and order types is so important.
If you’re a regular investor who plans to use market and limit orders but doesn’t need advanced tools, consider a platform like Questrade or Wealthsimple, which offers commission-free stock and exchange-traded fund (ETF) trades. If you’re an active trader/sophisticated investor, Interactive Brokers, or a bank broker like TD Direct Investing will offer more advanced trading capabilities.
Colin Graves is a Winnipeg-based financial writer and editor whose work has been featured in publications such as Time, MoneySense, MapleMoney, Retire Happy, The College Investor, and more. Before becoming a full-time writer, Colin was a bank manager for over 15 years.
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