Market order vs limit order

This is for new investors who are little confused about the difference between a market order and a limit order.

I will explain the difference: A sell or buy market order is when you ask the stockbroker to buy or sell a security at the current available price on the market. In other words, it is unrestricted. A sell or buy limit order is when you specify exactly at what price you want to sell or buy the security. Let us look at some examples:

Market order: Assuming that stock ABC is trading at $10 per share on the market. Trader A places a market order to buy 100 shares of stock ABC. That means, Trader A wants to buy the stock at any current price the stockbroker can get it on the market. If the price goes to $12 the stockbroker will buy at that price. If it goes to $8, the broker will issue a buy at $8. Remember that your order does not get executed right away for most of the time. The stockbroker will execute your order as soon as he gets to it.

Limit order: Assuming the same stock ABC is trading at $10. Now, Trader B put a limit order to buy that same stock ABC at $8. That means, the stockbroker will only execute the order if the price of the stock goes to $8 or below. If the price never reaches $8, there will not be a buy execution on behalf of Trader B.

From the examples above we could determine that a limit order works in your advantage as an investor. It is possible to end up paying a much higher price by placing a market order instead of limit order because the limit order gets you exactly what you want. That is trading 101: “buy low, sell hi”.

It is definitely clever as an investor to use limit order rather than market order. I personally do not use market order. You are at the mercy of your broker. It is like giving money away to your broker.