Limit Order Vs. Market Order: What’s the Difference
As a stock trader, you must be able to tell the difference between a limit order vs. market order. These trading terms will help you know how and when to buy or sell your stock and gain the targeted profits. As a result, you won’t easily make losses.
A market order instructs the broker to execute the trade immediately at the current market price. For example, if you are buying stock, you will purchase at the seller’s asking price and sell at the buyer’s bidding price. On the other hand, a limit order commands the broker to execute the trade at your specified price to make more profits.
Understanding Limit Vs. Market Order
Market and limit orders are standard terms used in the stock market. If you are transacting at the market order, your broker will trade your stock immediately after the market opens. The buying or selling of the inventory is done at the current market price.
At market order, brokers buy the stock at the seller’s asking price. The buyer’s bidding price will determine the selling price of the security. In most cases, you do not have control of the amounts when transacting using a market order.
Although sometimes a market order could be executed at the last traded price, this is not always the case. The prices change fast, mainly in fast-moving and volatile markets. The only times you can execute the trade at the last traded price is if the bid or ask price matches the previous prices.
On the contrary, limit orders instruct stock brokers to wait and execute the trade only at the specified prices in the future. You can set a maximum price to buy stocks or a minimum price to sell.
For example, you can set a limit order to buy the stock at $5 or less. Therefore, your broker should not spend above $5 to trade. They can wait for months until the buying prices drop to $5 to buy the stock.
Stock trades based on limit orders can take time to execute because buying and selling prices take time to drop and rise. However, traders can profit more using this stock order type if the intended prices align.
To choose the best stock order type to use when trading, you must first know the pros and cons of each to see which one is more beneficial.
The Advantages and Disadvantages of Market Order Vs. Limit Order
Before choosing market orders over limit orders, it is essential to compare the pros and cons.
Here are some benefits of trading at market orders.
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You Don’t Need to Wait for Your “Perfect” Prices
When trading at market orders, your broker will execute the trade immediately after entering the market, regardless of the prices. If the current bidding price is high, you will make profits quickly when you sell. You will also likely buy stocks and securities at a lower price if the seller’s ask price is low.
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You Can Automate the Investment Strategy
Since you are not waiting for special market prices to sell or buy stocks and shares, you can automate your investment. That is advantageous for investors interested in using the dollar-cost averaging strategy.
The dollar cost averaging helps investors to spread investment purchases at regular intervals. For example, you can divide the investment amount into equal dollar portions instead of using a lump sum to buy stock. That helps reduce risks during volatility because you can buy more when prices decline and buy fewer stocks when the prices of the Canadian dollar shoot up and down.
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It’s an Advantage When Trading Stock for a Big Company
Stocks for big companies are highly liquid because of the high demand from buyers and sellers. Besides, the selling and buying prices are slightly different, usually a penny or two, so you can sell it using the market order.
Sometimes you can be lucky to trade at the last quoted price or a higher bid if selling and a low asking price if buying. These will earn you significant money, especially if you are trading large stocks.
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Guarantee of Trade Completion
With a market order, you are sure that your trade will be complete. That’s because the trade gets executed immediately after the market opens, so you don’t worry about missing out on purchasing or selling securities.
Disadvantages of Market Orders
Although there are many benefits to enjoy when trading using market orders, it has disadvantages.
Since your trade gets executed immediately after the market is open, regardless of the market prices, you can easily make losses. For example, it happens if the bid prices of stocks go lower than the previous prices or the ask prices are higher.
Market prices can also shift if you enter a market order past the regular trading hours. If the trade gets pushed to the next trading day, it could execute at lower prices than expected. You can avoid this by canceling the order.
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There is a Risk of Price Swings
Sometimes your transactions can cause a significant movement in the market prices. It is standard with traders who have a high proportion of company shares or those trading stock with a low volume of daily trades.
Advantages and Disadvantages of Limit Orders
Now that you know the pros and cons of market order, you can check those of limit orders and compare to see the best stock order type to use.
Advantages of Limit Orders
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You Trade Your Stocks at Your Desired Price
Limit orders are standard among stock investors who have set a specific price to buy or sell their securities. So, if you set that the trade can only execute at a particular price or higher, a limit order will protect the transaction from being executed until the stated price is reached.
Setting your desired prices and ensuring that the trades are complete at that cost helps you gain profits. It also ensures you buy stocks at the desired ask price and save some coins.
- It Ensures Less Movement of Market Prices
Unlike market orders, a limit order will not cause shifts in the market. That reduces the chances of lowering ask prices hence low profits.
- It Keeps You Safe When Buying Thinly Traded Stock
Thinly traded stocks or securities are hardly exchanged for cash if there isn’t a significant price change. They often have few buyers and are exchanged in low volumes. Trading thinly traded stock causes a shift in the trades, so setting a selling or buying price can save you from losses.
Disadvantages of Limit Orders
Some things you won’t enjoy when selling a stock at limit orders are;
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It Might Take Longer to Execute a Trade
You can’t execute the trade until the set market prices are reached. It means that it can take months to sell or buy securities depending on the movement of market prices.
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Some People Forget About Their Set Limit Orders
If you put a limit order for three months, you could forget about it only to find out that the trade was executed without knowing. However, these trades only run at the set order price.
Final Words
Before choosing a stock order type, comparing limit order vs. market order is essential. A limit order specifies the price you want to sell or buy stocks and securities, while a market order instructs your broker to execute the trade at the current price. To avoid hefty foreign currency exchange rates, use Knightsbridge FX for exchanges.