Market Order Vs. Limit Order: What’s The Difference?
INVESTOPAPER
What is Market Order?
A market order is a type of order to buy or sell a security at the best available price in the market at the time the order is placed. When a market order is executed, the investor is willing to pay the current market price for the security they want to buy, or willing to accept the current market price for the security they want to sell.
Market orders are typically executed immediately as they are designed to be filled quickly at the best available price in the market. However, since market orders do not specify a price, they are subject to price fluctuations, particularly in volatile markets. As a result, the actual price at which the order is executed may differ slightly from the quoted price at the time the order was placed.
Market orders are commonly used when an investor wants to buy or sell a security quickly and does not want to wait for a specific price point to be reached. They are generally used for securities that have high trading volumes and liquidity, and are less commonly used for securities that are thinly traded or have low liquidity.
What is Limit Order?
A limit order allows to buy or sell a security at a specified price or better. With a limit order, the investor specifies the maximum price they are willing to pay for a security they want to buy, or the minimum price they are willing to accept for a security they want to sell.
For example, if a stock is currently trading at Rs. 500 per share and an investor wants to buy it but only wants to pay up to Rs. 490 per share, they can place a buy limit order at a limit price of Rs. 490. The order will only be executed if the stock price falls to or below Rs. 490. Similarly, if an investor owns a stock that is currently trading at Rs. 500 per share and wants to sell it, but only if the price rises to at least Rs. 510 per share, they can place a sell limit order at a limit price of Rs. 510. The order will only be executed if the stock price rises to or above Rs. 510.
Limit orders give investors more control over the price at which their orders are executed, but there is no guarantee that a limit order will be executed. If the market price never reaches the limit price, the order may not be filled. Limit orders may take longer to be executed than market orders because they require the stock to trade at the specified price or better.
Limit orders are commonly used by investors who have specific price targets in mind or want to limit their exposure to price fluctuations. They are particularly useful for investors who want to buy or sell securities that are thinly traded or have low liquidity, as market orders may result in execution at a price that is significantly different from the current market price.
Market Order Vs. Limit Order
Order placement:
Market orders can be placed quickly and easily, as they only require the investor to specify the security they want to trade and the order type. Limit orders require the investor to specify the security, order type, order quantity, and limit price.
Execution speed:
Market orders are executed immediately, while limit orders may take longer to execute, as they require the stock to trade at the specified price or better.
Trading strategy:
Market orders are more suited for traders who want to enter or exit a position quickly, while limit orders are more suited for traders who want to take a more measured approach and wait for a specific price point.
Price guarantee:
Market orders do not offer price guarantees, as the order is executed at the best available price in the market. In contrast, limit orders offer a price guarantee, as the order is executed only at the specified price or better.
Risk:
Market orders can expose investors to price fluctuations and unexpected execution prices, particularly in volatile markets. Limit orders can expose investors to the risk of the order not being filled if the specified price is never reached.
Price impact:
Market orders can have a greater impact on the price of a security, particularly for thinly traded securities or securities with low liquidity. Limit orders generally have less price impact, as they do not result in immediate execution.
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