Market Order vs. Limit Order: What’s the Difference?

Fact checked by Patrice WilliamsReviewed by Samantha SilbersteinFact checked by Patrice WilliamsReviewed by Samantha Silberstein

Market Order vs. Limit Order: An Overview

A market order deals with the execution of an order. The price of a security is secondary to the speed of completing the trade. Limit orders deal primarily with the price so the transaction doesn’t occur if the security’s value is currently resting outside of the parameters set in the limit order.

Buying stock is a bit like buying a car. You can pay the dealer’s sticker price with a car and drive it off the lot or you can negotiate a price and refuse to finalize the deal unless the dealer meets your valuation. The stock market works similarly.

Key Takeaways

• Market orders are transactions meant to be executed as quickly as possible at the current market price.
• Limit orders set the maximum or minimum price at which you’re willing to complete the transaction, whether it be a buy or sell.
• Market orders offer a greater likelihood that an order will go through but there are no guarantees because orders are subject to availability.
• Limit orders may never be filled if the limit order price isn’t met. The order expires based on the specified expiration date in this case.
• Limit orders are often used for more volatile investments because investors may pay substantially more when market orders are used and there are large, material price swings in a short amount of time.

Market Orders

There are two fundamental execution options when an investor places an order to buy or sell a stock. The first is to place an order “at the market.” Market orders are transactions meant to be executed as quickly as possible at the current market price.

A layperson thinks of market orders when they imagine a typical stock market transaction. These orders are the most basic buy-and-sell trades where a broker receives a security trade order and then processes it at the current market price.

All orders are processed within present priority guidelines. There’s always the threat of market fluctuations occurring between the time the broker receives the order and the time the trade is executed when a market order is placed. This is especially a concern for larger orders that take longer to fill and can move the market on their own if they’re large enough. Sometimes the trading of individual stocks can be halted or suspended, too.

It’s also worth bearing in mind that a market order that’s placed after trading hours will be filled at the market price on opening the next trading day. The caveat to this would be to participate in an after-market trading platform that’s offered by many brokers.

Important

There’s no guarantee that a market order will actually go through even though they offer a greater likelihood of a trade being executed. All stock market transactions are subject to the availability of given stocks and can vary significantly based on the timing, the size of the order, and the liquidity of the stock.

Market Order Example

Let’s say an investor enters an order to purchase 100 shares of Company XYZ Inc. “at the market.” The investor opts for whatever price XYZ shares are going for so the trade will be filled rather quickly at the current price of that security. The investor’s order would be filled with securities costing $1,000 if the price per share is $10.

The investor often doesn’t know the exact price at which the shares would be purchased when the order for XYZ is placed. The broker might have quoted the shares at $9.80 each when the market order was placed because this may have been the market price as the order was being prepared.

This highlights the importance of not using market orders for volatile investments. Consider the market order initially quoted at $5 per share. The investor may now have to pay much more than what the market price otherwise appeared to be because XYZ is a volatile investment.

Limit Orders

A second primary type of order that can be placed is set “at the limit” or “at a limit price”. Limit orders set the maximum or minimum price at which you’re willing to buy or sell.

Limit orders are designed to give investors more control over the buying and selling prices of their trades. A maximum acceptable purchase price amount must be selected before placing a purchase order. Minimum acceptable sales prices are indicated on sales orders.

Limit orders can be of particular benefit when trading in a stock or other asset that’s thinly traded, highly volatile, or has a wide bid-ask spread, the difference between the highest price a buyer is willing to pay for an asset in the market and the lowest price a seller is willing to accept. Placing a limit order puts a ceiling on the amount an investor is willing to pay.

Traders should be aware of the effect the bid-ask spread has on limit orders. The ask price, not just the bid price, must fall to the trader’s specified price for a limit order to buy to be filled.

Important

A limit order offers the advantage of being assured that the market entry or exit point is at least as good as the specified price.

Limit Order Example

It might make sense to enter a limit order if an investor is worried about buying XYZ shares for a higher price and thinks it’s possible to get them at a lower price instead.

Maybe the current market price for XYZ is $9.80. An investor believes the equity will fluctuate between $9.50 and $10.10 this trading period. The investor may place a limit order to purchase 100 shares of XYZ at $9.50 each in this example. The market price is higher than the order price of $9.50 so the order won’t fill when it’s placed.

The price of XYZ drops to $9.50 later in the day. The limit order is filled and the investor buys the securities for a total of $950. It doesn’t matter that the price of XYZ drops further to $9 because the order is filled.

Now let’s imagine that the shares didn’t drop to $9.50. The price of XYZ went from $9.80 to $11 instead. The investor has missed out in this example. Their order would likely have been filled if they had placed a market order. Instead, they don’t have any shares of XYZ because their specified price was never met.

Note

It’s common to allow limit orders to be placed outside of market hours. The limit orders are placed into a queue for processing as soon as trading resumes in these cases.

Key Differences

Both types of orders can result in the acquisition of stock but each has different approaches, is set in a different manner, and may result in a single share of stock being acquired at a different price.

Market orders are most often easier to set. An investor doesn’t have to specify their price as does an investor does with a limit order. The limit order often has more specifications such as when the order will expire. A market order doesn’t expire. It’s usually executed immediately because the market price is the agreed-upon price.

A market order indicates that a buyer is willing to buy at the current market price so the order is almost always executed. A limit order is only triggered when the limit price meets the buyer’s specifications. A buyer’s order may not be filled if the market price doesn’t drop far enough on a limit order.

Market Order

• Easier to set up because no price is specified

• Will almost always be filled as trade executes at the current market price

• Doesn’t have an expiration because it usually fills immediately

• May be more suitable for stable investments

Limit Order

• The investor must specify the price at which the order will trigger

• May not be filled if the limit order price isn’t met by the market

• Is often accompanied by an expiration date when the order will close if it’s not yet filled

• May be more suitable for volatile, unpredictable investments

Special Considerations

The risk inherent to limit orders is that the investor’s order may fail to execute should the actual market price never fall within the limit order guidelines. Another possibility is that a target price may finally be reached but there isn’t enough liquidity in the stock to fill the order when its turn comes.

A limit order may sometimes receive a partial fill or no fill at all due to its price restriction. An investor may only acquire 30 shares of XYZ at their limit order price of $9.50 in our example based on the liquidity of the shares they’re trying to buy. The rest of the order might expire if it’s not triggered.

Limit orders are more complicated to execute than market orders so they can result in higher brokerage fees. But it may be difficult to find the actual price for low volume stocks that aren’t listed on major exchanges, making limit orders an attractive option.

Is a Market Order Better Than a Limit Order?

A market order is more useful in some situations. A market order is often an easier, less expensive option for long-term hold investors who may not care about tiny fluctuations in price.

Is a Limit Order Cheaper Than a Market Order?

A limit order is a more specific type of order that often has more features, customizations, and options so it may be assessed higher fees compared to a market order. Many online brokerages offer free trading based on restrictions or limitations that offer both limit orders and market orders for free.

When Should You Use a Limit Order?

A limit order is often advised for highly volatile securities. It gives investors greater control over dictating the price at which their order will close without fear of paying or selling at a price they don’t feel comfortable with because they don’t know the price they’ll pay at the market for securities that may leap or fall in price.

What Is a Stop Order?

A stop order is a special type of order designed to buy or sell a security at the market price when the market price has traded at or through a designated stop price. This type of order combines functions of both a market order and a limit order because it only executes when a specified price is reached by the market. However, the security is often traded at an unknown price dictated by the market.

The Bottom Line

Investors can use two common types of orders to buy or sell stocks: market orders and limit orders. Market orders often execute right away at whatever price the market is charging. Limit orders won’t trigger until the market price meets whatever price the investor is looking for. Limit orders won’t fill in some cases because the market price may never meet the limit price specified.

Disclosure: This article is not intended to provide investment advice. Investing in securities entails varying degrees of risk and can result in partial or total loss of principal. The trading strategies discussed in this article are complex and should not be undertaken by novice investors. Readers seeking to engage in such trading strategies should seek out extensive education on the topic.

Read the original article on Investopedia.