Difference Between Market Order and Limit Order
Market order refers to the order in which buying or selling of the financial instruments will be executed on the market price prevailing at that point of time, whereas, Limit order refers to that kind of an order that purchases or sells the security at the mentioned price or more better.
A market order is an order to buy or sell a stock at the best available price and is usually executed on an immediate basis.
A limit order, on the other hand, will allow setting the price at which one wants to buy or sell the stock. However, unlike market orders, the trade will only get executed when the price breaches the level that has been specified.
Market Order vs. Limit Order Examples
#1 – Limit Order
Let’s say Mr. A wants to purchase shares of PQR Limited at $60, which is currently getting traded at $63, and the limit order is set at $60. This price can go either up or down. However, as the stock trades at $60, the order triggers, and Mr. A has to buy at the pre-determined price.
Once the stock is purchased at $60 and if Mr’ A’ decides to sell the same once the price reaches $64, a new limit order has to be set for the same. Once the trade price reaches $64, the order becomes active, and the new target price is set. This feature makes limit orders useful in volatile market environments offering an advantage to investors for setting the price.
It will protect from buying a stock too high or selling it at a too low price. It should also be noted that if the price of the stock does not reach the limit price, the trade will not get executed. The broker’s fee schedule and other charges should also be factored in before considering the price and the possible gains that can be made.
#2 – Market Order
Such orders are straightforward to place and depend on the requirement of the investor. The broker needs to be informed details of the stock and quantity, say 25 shares of Microsoft Inc. The broker will enter the trade as a market order, and the shares shall be executed at the prevailing price.
Market Order vs. Limit Order Infographics
Let’s see the top differences between market order vs. limit order.
- A market order is a transaction that is meant to be executed as quickly as possible at the existing/market price. On the other hand, a limit order sets the minimum or maximum price at which one is willing to buy or sell. The order gets executed once the price level is triggered.
- If market orders are large in numbers, there is a threat of difference in price at the time order was placed, and when it was executed since placing large orders can be time-consuming. No such issues will exist in case of limit orders as the buy/sell price is pre-determined. However, in limit orders, if the target price is reached, there may not be enough liquidity in the stock to fill in the order when its turn comes. It may receive partial or no fill due to price restrictions.
- Market orders are primarily dealing with the execution of the order with the speed of the transaction is more essential than the price. However, limit orders primarily deal with the price, and if the value of the security is outside the parameters of the limit order, the transaction will not occur.
- Market orders placed after trading hours will be filled at the market price and open at the next trading day, whereas limit orders placed outside market hours are common. In such cases, the orders are placed into a queue for processing as soon as trading resumes.
- Market orders can have lower brokerage fees, but since limit orders can be complicated to execute, it may charge higher brokerage.
- Market orders are feasible for any kind of stock, but limit orders are beneficial when a stock is thinly traded, high volatile or has a wide bid-ask spread.
Market Order vs. Limit Order Comparative Table
|Basis of Comparison||Limit Order||Market Order|
|Meaning||Order to buy/sell stocks at a specific price or better.||Order to buy/sell a stock at the best available price.|
|Buying or Selling Price||The buy or sell price has to be specified.||One does not have to specify the price, and the order is executed at the market price.|
|Order Submission||Submitted when price level reaches the trigger price;||The order is submitted and executed on an instant basis.|
|Stop Loss||Can be used to set stop loss;||Cannot be used to set stop loss;|
Both Market Order vs. Limit Order have their pros and cons, and the final choice depends on the investor. Though limit order offers the cushion of a fixed price range, it can be costly. Market orders are easy to execute but can be a tricky choice under volatile market conditions.
This article has been a guide to Limit Order vs. Market Order. Here we discuss the top differences between them along with infographics and comparison table. You may also have a look at the following articles for gaining further knowledge –