Difference Between Market Order and Limit Order

A market order is an order to buy or sell a stock at the best available price and is usually executed immediately.

On the other hand, a limit order will set the price for buying or selling 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

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#1 – Limit Order

For example, Mr. A wants to purchase PQR Ltd. shares at $60, currently being traded at $63. Therefore, the limit order is set at $60. Of course, this price can go either up or down. However, as the stock trades at $60, the order triggers, and Mr. A will have to buy at the predetermined 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 needs to be set for the same. Once the trade price reaches $64, the order becomes active, putting the new target price. 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. One should also note that the trade will not get executed if the stock price does not reach the limit price. They should also factor in the broker’s fee schedule and other charges before considering the price and the possible gains they can make.

#2 – Market Order

Such orders are straightforward to place and depend on the investor’s requirement. First, the broker needs to be informed of stock details and quantity, for example, 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 us see the top differences between a market and limit orders.

Key Differences

  • A market order is a transaction meant to be executed at the existing/market price as quickly as possible. On the other hand, a limit order sets the minimum or maximum price 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 price difference when placed and executed since large orders can be time-consuming. No such issues will exist in the case of limit orders as the buy/sell price is predetermined. However, if the target priceTarget PricePrice Target in the context of stock markets, means the expected valuation of a stock in the coming future and the valuation may be done either by the stock analysts or by the investors themselves. For an investor, price target reflects the price at which he will be willing to buy or sell the stock at a particular period of time or mark an exit from their current position.read more is reached in limit orders, there may not be enough liquidity in the stock to fill in the order when its turn comes. As a result, it may receive partial or no fill due to price restrictions.Market orders primarily deal with the order’s execution, with the transaction’s speed being more essential than the price. However, limit orders primarily deal with the price, and if the security value is outside the limit order’s parameters, the transaction will not occur.Market orders placed after trading hours will be filled at the market price and open on the next trading day. In contrast, limit orders placed outside market hours are common. In such cases, the orders are put into a queue for processing as soon as trading resumes.Market orders can have lower brokerage feesBrokerage FeesA brokerage fee refers to the remuneration or commission a broker obtains for providing services and executing transactions based on client requirements. It is usually charged as a percentage of the transaction amount.read more, but they may charge higher since limit orders can be complicated to execute.Market orders are feasible for any stock, but limit orders are beneficial when a stock is thinly traded, highly volatile, or has a wide bid-ask spread Bid-ask SpreadThe asking price is the lowest price at which a prospective seller will sell the security. The bid price, on the other hand, is the highest price a prospective buyer is willing to pay for a security, and the bid-ask spread is the difference between them.read more.

Market Order vs. Limit Order Comparative Table

Conclusion

Both market order and limit order have pros and cons, and the final choice depends on the investor. Though limit order offers a fixed price range cushion, it can be costly. On the other hand, market orders are easy to execute but tricky under volatile market conditions.

This article is a guide to Market Order vs Limit Order. We discuss the difference between a limit order and market order, infographics, and a comparison table. You may also have a look at the following articles for gaining further knowledge: –

  • Buy Limit Order ExamplesMarket Neutral DefinitionBull Market vs. Bear MarketFair Value vs. Market ValueLiquidity Premium