Limit Order Vs Market Order – Forbes Advisor


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Not all stock transactions are created equal – choose the wrong time to buy or sell and it could cost you money. This is because stock prices fluctuate quickly, making it essential for new investors to understand the difference between two of the main types of orders: limit order and market order.

What is a market order?

Orders are the way you trade stocks using your brokerage account. A market order is an instruction to buy or sell a security immediately, regardless of the price at the time of the trade.

Timing is of the essence, especially with a market order. The share price when your trade is executed may be different than when you submitted the order. In other words, you could pay more than you expected to buy a security, or an alternative that you could end up selling for less than you wanted.

This isn’t always a big deal for everyday investors – the prices of most investments don’t change much for short periods of time. But occasionally, with certain titles or during particularly volatile times, like the GameStop saga of 2021, even a few seconds could result in significant price differentials.

How to place a market order

To place a market order, simply select the market order type on your brokerage’s trading platform or investment app. If you have no choice, a market order is usually the default option. After selecting your order type, enter the number of shares you want to buy or sell.

Since a market order goes regardless of the price, you usually don’t need to choose a period in which your trade should take place. Your order must go through this trading session (or the next one if it is after hours), unless you are dealing with a security with very low trading volume and no one is looking. to buy or sell it.

What is a limit order?

A limit order is an order to buy or sell with specific instructions on when the trade should be executed. You provide a maximum price to buy or a minimum price to sell your shares. Your brokerage will only place the trade if it can buy or sell your investment at that price or better.

Suppose a stock has a current market price of $ 100, for example, but you are concerned that the price will change quickly. If you are looking to buy, you can place a limit order of $ 102, which means you would only buy if the price is $ 102 or less when the trade executes. Otherwise, the broker would not make the purchase. If you are looking to sell, you can set a limit order of $ 98, which means you would only sell if the market price is $ 98 or more.

How to place a limit order

To place a limit order, you will need to select “limit order” on your brokerage’s trading platform or investment app. Then you enter your limit price and the number of shares you want to buy or sell. Since your trade may not complete immediately if the price exceeds your limit, you also select how long the limit order is valid.

“You can keep your order open for the current trading day only, called a ‘day only’. If it is not filled by the end of the trading day, the order will be canceled, ”says Jonathan Bird, Chartered Financial Planner (CFP) and CEO of Farnam Financial.

You can also choose an expiration date set for a certain time in the future, or keep the order open indefinitely until you manually cancel it, known as a “Good-Until Canceled” order. “Typically, GTC orders expire 60 days. If so, your purchase order will notify you of the expiration date before your order is submitted, ”says Bird.

Market order vs limit order: pros and cons

Advantages of the market order

  • Your business is still going. When you place a market order, you know your trade will go through.
  • No additional charges. Since market orders are usually executed all at once, you will only pay one trading fee. Limit orders do not have this guarantee as several transactions may be required to fill a limit order. (Note: Most brokerages these days don’t charge a trading fee upfront no matter how many orders you place, so it may be less of a factor.)
  • Few price surprises. For most stocks, especially those with a lot of stock in the market, dramatic price swings don’t happen in seconds. When you place a market order, there is a good chance that the price you see first is quite close to the price you are trading at.

Disadvantages of market order

  • No control over the price. With market orders, you make sure the trade goes through but you are not guaranteed a certain price. It can mean that you pay more or receive less than you expect.
  • Potentially significant price fluctuations. For investments with less trading volume and fewer shares in the market, such as small cap companies or penny stocks, larger and faster price fluctuations are possible. Even with large cap markets, there can be times when extreme fluctuations occur, such as stock market crashes or other unusual events. If you place a market order in any of these situations, the trading price could be very different from what you expected.

The advantages of the limit order

  • Full price control. With a limit order, your trade will not go beyond your maximum target price to buy or your minimum price to sell. This protects you against sudden and wild price changes.
  • Can be set for future transactions. You don’t have to use limit orders just for one trade today. By setting a limit order above the market price, you create automated instructions for an order to execute whenever a target price occurs in the future.

Disadvantages of limit order

  • The order may not go through. Since limit orders are price bound, you don’t know for sure if your trade will ever be executed. A given title may never cross the threshold you specify.
  • Could lead to partial orders. Limit orders are dynamic in that they can only be executed if the price conditions are met. This means that if you try to sell 100 shares for a minimum price of $ 50, only a portion of your shares can be sold if the price drops below $ 50 at mid-order. If you want to avoid this, you can insert restrictions on your limit order, such as “all or nothing” or “fill or kill”. This, however, increases the likelihood that your trade will not go through at all.
  • May incur additional charges. If your order cannot be fully executed at the same time, you may end up paying a trading fee every time part of it is executed. This is partly why it is important to find brokerage firms with low or no trading fees.

Related: Forbes Advisor’s Best Online Brokers for Day Trading

When should you use limit or market orders?

When you should choose a market or limit order depends on your priorities. If you absolutely want the trade to go through and the final price is less, you should use a market order. For less volatile securities with less dramatic price swings, market orders are also less likely to run into problems.

On the other hand, if you are very price sensitive for your transaction, engage in highly speculative transactions that can experience large price changes, or trade particularly large quantities where small price differences occur. really add up, so a limit order might make sense.

For long-term investors, market orders may be the ideal solution, says Brian Stivers, investment advisor and founder of Stivers Financial Services in Knoxville, Tenn. better to just place a market order and get the security at the current market value, ”he says.

Remember: when you invest for the long term, the exact price you pay is less important. Over the years and decades of capitalization, the substantial growth in investments makes the precise purchase much less important.

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