Order Types: Market Orders vs Limit Orders?

Buy and Sell. With stock market order types, start with the basics

Buy sell, Buy and Sell—mattjiggins (Flickr.com)


“Every time I get out they pull me back in!”  – The Godfather III

Choosing the right way to get into the market is just as important as choosing how you get out.  If you do not use the correct order type, you could end up missing out on profit, taking an unexpected loss, or worse! Going into the opposite position you intended to.  If this last one has happened to you, don’t worry, you’re not the only one.

Most traders we know (self included) have made the mistake of entering into the wrong position by accident, but this error is usually caused by either what’s called a fat finger, or keystroke error.  Anyone who is at the point of placing an order should already be familiar with the different order types available.

So let’s take a look at what’s out there:

Market Orders

So Just what are market orders?

A market order is essentially an order to buy or sell at any price going.  If you call up your broker and say “buy at market” and the price goes up $40 by the time the order gets through, you’re stuck with the shares (don’t laugh, this actually happened to me back in 99 with ARPT, of course, it was a market order on an IPO which is more of a crazy limit order, but more on that in another article)

Bottom line, market orders mean more slippage.  This is why most high frequency trading software is programmed using limit orders.

Limit Orders

Limit orders explained

A limit order lets you choose a maximum price or “limit” to how much you are willing to pay.  There are generally 2 aspects to a limit order:

1. Duration

2. Price

The duration is the limit you have in “Time” for the order to be active.  For example, if you want to buy AAPL shares before their earnings come out at the end of the day, but are not sure you can get your price by then, you can set a limit on the order that will be good till the end of day.  If your price come in the following day, no action will take place because the order is no longer good.

A limit on Price simply means that the trade will not be executed above or below a price of your choosing.


Market Orders Vs Limit Orders

So what is the difference between market orders and limit orders?

Market orders are instantaneous and you are guaranteed execution, whereas  limit orders give you the control to choose your price. When using orders on entry, a limit order can prevent your from paying too much (chasing the stock) Whereas on an exit (stop loss exit) a market order is actually better to prevent you from chasing the stock and losing to much money.  However, another advantage is that they can hit dark liquidity that a human eye can’t see.

Market orders are also better for those who are not “hands on”. For example, if you work in a different profession and do not have time to keep on top of your positions, market orders will probably work best for you (especially on exit). A day trader however is much better having a limit price at the tips of their fingers because they can make decisions that are much more complex than can be programmed into a computer and thus able to save themselves money and slippage.

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