When you place an order to buy or sell a share, there are two main options – market order and limit order.
The difference between the two is simple:
- Market order: Your order will be executed immediately at best available price.
- Limit Order: You can set a price, and if the stock comes to your price, it’ll get executed.
The left side of the image is ‘Market Order’ and right side is ‘Limit Order’. Notice how the price is disabled in ‘Market order’. But when you select ‘Limit Order’ you are allowed to set your price.
Advantage of Market Order
- In most cases, your order will be completed immediately.
- There is no need to set a price.
Disadvantage of Market Order
- Your price of buying could be higher than current price of the share.
- Your price of selling could be lower than current price of the share.
Advantage of Limit Order
- You’ll know the exact price at which you are buying or selling a share.
- Limit order can be used to set stop loss.
Disadvantage of Limit Order
- Your order may not get executed immediately.
- If you want to buy a share and you set a ‘limit price’ lower than current market price. The stock might not come to your price, it can continue to go up and you may not be able to buy the share.
Long term investors should prefer the ‘Market order’ option, as it does not matter if the price is a little higher or lower.
Note: For stocks that have no buyers or sellers, your ‘market order’ might not get executed immediately. To buy a share, there has to be a seller. To sell a share, there has to be a buyer. Else, the order won’t get executed.