Limit Order vs. Market Order: What’s the Difference?

What is the difference between a limit order and a market order?

Market orders involve instructions to buy or sell securities immediately at the current price. Although market orders for the average investor are usually executed within seconds, the price may change from the given quote. Market conditions can shift quickly, other orders can consume available supply, and news events and holidays can all affect the price at which a market order is executed.

Price

Market orders can be filled at any price. However, securities brokers are required to make “reasonable efforts” to obtain the best terms, a precautionary requirement referred to as “best execution” for their clients. The Financial Industry Regulatory Authority (FINRA) regulates how securities brokers execute their clients’ orders. In 2019, FINRA imposed a $1.25 million fine on Robinhood for violating best execution rules.

Execution

Market orders are guaranteed to be executed in most exchanges because there is always a market. Exchanges such as the New York Stock Exchange (NYSE) and Nasdaq have specialists and “market makers” who are always ready to buy or sell any of the securities listed on those exchanges.

Stop

A stop is an indicator to place an order. A “buy stop” is activated when the market price reaches or exceeds the current market price. A “sell stop” is activated when the market price is at or below the current market price. A buy limit order is placed and filled if the market price remains at or below the limit. A sell limit order is placed and filled if the market price remains above the limit.

Which is more suitable for you?

If you are just starting to trade, it is important to know when market orders may not be a good option. Market prices can change significantly throughout a trading day. For example, Advanced Micro Devices jumped 9% on November 8, 2021, then fell 3.3% the next day. The volatility index known as the Cboe Volatility Index for the U.S. stock market is described through the expected volatility of the Standard & Poor’s (S&P) 500 via put and call options with the term “fear index.”

Trading stocks that do not trade on any of the major national exchanges like the New York Stock Exchange or Nasdaq. These companies are often small or “microcaps.” Their quotes and final sale prices can differ significantly because there may not be an active market for those stocks.

Exchange-Traded Funds (ETFs) are baskets of stocks or bonds that can be traded on national exchanges, or in some cases, over the counter. Some ETFs have unusual strategies or holdings, making them difficult to sell. Like small stocks, the final sale prices can differ significantly from the quotes.

If you decide to start an active strategy for buying and selling stocks, limit orders and buy limit orders may help you manage your portfolio. You can set the buy or sell price (entry and exit points) and place the order as “good till canceled” (GTC), where the order will remain open until the market hits your price.

Conclusion

Unless specified otherwise, your buy/sell order will be placed as a market order. Market orders typically execute immediately and are filled at the market price. Speed is the main factor when choosing a market order. Limit orders and buy limit orders are only executed when the market reaches the specified limit and/or stop price. For many investors, limit orders can help manage active trading by dictating purchases and sales according to desired prices.

Source:

https://www.thebalancemoney.com/limit-order-vs-market-order-what-s-the-difference-5211036