Stock Order Types Explained: Market vs. Limit Order

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Stock Order Types Explained: Market vs. Limit Order

With the advent of digital technology and the internet, more investors are electing to purchase and sell stocks for themselves online rather than paying huge fees to advisers to execute transactions. However, before you begin buying and selling stocks, you must first grasp the various sorts of orders and when they are acceptable.

In this post, we’ll go over the different sorts of stock orders and how they might help you with your investment strategy.

Key Takeaways

  • Depending on your investing style, different types of orders can be used to trade stocks more effectively.
  • A market order simply buys (or sells) shares at the prevailing market prices until the order is filled.
  • A limit order specifies a certain price at which the order must be filled, although there is no guarantee that some or all of the order will trade if the limit is set too high or low.
  • Stop orders, which are a sort of market order, are activated when the price of a stock rises above or below a specified threshold; they are often used to protect against bigger losses or to lock in profits.

Market Order vs. Limit Order

The market order and the limit order are the two basic kinds of orders that every investor should be familiar with.

Market Orders

The most fundamental sort of trading is a market order. It is an instantaneous purchase or sell order at the current price. If you are intending to acquire a stock, you will usually pay a price that is close to or equal to the advertised ask. If you intend to sell a stock, you will be paid at or around the listed bid.

One thing to keep in mind is that the latest traded price is not always the price at which the market order will be executed. In turbulent and fast-moving markets, the price at which you execute (or fill) the deal may differ from the last traded price. Only when the bid/ask price is precisely at the previous transacted price will the price stay constant.

Market orders do not guarantee a price, but they do promise that the order will be filled immediately.

Individual investors who wish to acquire or sell a stock quickly choose market orders. The benefit of utilizing market orders is that the deal is assured to be completed; in fact, it will be done as quickly as feasible. Although the investor does not know the precise price at which the stock will be purchased or sold, market orders on equities that trade in the tens of thousands of shares each day are likely to be executed around the bid/ask pricing.

Limit Orders

A limit order, also known as a pending order, enables investors to purchase and sell shares at a predetermined price in the future. This sort of order is used to execute a transaction if the price exceeds a certain threshold; else, the order will not be completed. A limit order, in essence, specifies the maximum or lowest price at which you are ready to purchase or sell.

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If you wanted to acquire a stock for $10, for example, you might place a limit order for that amount. This indicates you would not spend more than $10 for that specific stock. However, you may still acquire it for less than the $10 per share mentioned in the order.

There are four types of limit orders:

  • Buy Limit: an order to buy a security at or below a certain price. Limit orders must be placed on the proper side of the market to guarantee that they achieve their goal of raising the price. This involves placing the order at or below the current market bid for a buy limit order.
  • A sell limit order is an order to sell a security at or above a predetermined price. The order must be made at or above the current market ask to secure a favorable pricing.
  • Buy Stop: an order to purchase a securities at a price more than the current market bid. A purchase stop order becomes activated only once a certain price level is met (known as the stop level).Buy stop orders are those put above the market, while sell stop orders are those placed below the market (the opposite of buy and sell limit orders, respectively).When a stop level is achieved, the order is automatically changed into a market or limit order.
  • A sell stop order is an order to sell a securities at a price lower than the current market ask. A sell stop order, like a purchase stop, becomes active only once a certain price level is achieved.

Market and Limit Order Costs

Investors should consider the additional fees when picking between a market or limit order. Market orders often have lower commissions than limit orders. The difference in commission might range from a few pennies to more than ten dollars. When you impose a limit limitation on a market order, for example, a $10 commission might be increased to $15. Make sure your limit order is profitable before you put it.

Assume your broker charges a market order of $7 and a limit order of $12. Stock XYZ is now selling at $50 per share, and you want to purchase it for $49.90. Placing a market order to purchase ten shares costs $500 (10 shares x $50 per share) plus a $7 fee, for a total of $507. If you place a limit order for 10 shares at $49.90, you will pay $499 plus $12 in fees, for a total of $511.

Even if you save a little money by purchasing the stock at a cheaper price (10 shares x $0.10 = $1), you will lose it in the order charges ($5), a difference of $4. Furthermore, in the event of the limit order, the stock may not fall below $49.90 or less. As a result, if it continues to increase, you may miss out on the chance to purchase.

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Additional Stock Order Types

After we’ve covered the two primary orders, here’s a list of some additional limits and unique directions that many brokerages accept on their orders:

Stop-Loss Order

One of the most useful orders is a stop-loss order, also known as a halted market, on-stop buy, or on-stop sell. Unlike limit and market orders, which become active as soon as they are placed, this order stays inactive until a particular price is passed, at which point it is triggered as a market order.

For example, if a sell stop-loss order is set on XYZ shares at $45 per share, the order will remain inactive until the price reaches or falls below $45. The order is subsequently converted to a market order, and the shares are sold at the best available price. You might consider utilizing this sort of order if you don’t have time to constantly monitor the market but need to protect yourself from a major downward move. Before you travel on vacation, a stop order is a smart idea.

Stop-Limit Order

These are similar to stop-loss orders, but as the name implies, they have a price limit at which they will execute. A stop-limit order specifies two prices: the stop price, which converts the order to a sell order, and the limit price. Instead of being a market order to sell, the order is transformed into a limit order that will only execute at the limit price or better. This may help to prevent a possible issue with stop-loss orders, which can be triggered during a flash crash when prices drop but then rebound.

All or None (AON)

This form of transaction is particularly significant for people who invest in penny stocks. An all-or-none order guarantees that you will get either the complete amount of merchandise ordered or none at all. This is usually an issue when a stock is very liquid or a limit is set on the transaction. For example, if you place an order to purchase 2,000 shares of XYZ but only 1,000 are being sold, an all-or-none limitation implies your order will not be honored until at least 2,000 shares at your selected price are available. If you do not specify all-or-nothing, your 2,000-share purchase will be partly completed for 1,000 shares.

Immediate or Cancel (IOC)

An IOC order requires that whatever portion of an order that can be executed in the market (or at a limit) in a very short period of time, frequently only a few seconds or less, be filled and the remainder of the order canceled. If no shares are exchanged within that “immediate” time, the order is cancelled.

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Fill or Kill (FOK)

This order combines an AON order with an IOC specification; in other words, it requires the full order size to be traded in a very short period of time, frequently a few seconds or less. The order is canceled if neither requirement is satisfied.

Good ‘Til Canceled (GTC)

This is a time constraint that you may apply to distinct orders. A good-til-canceled order will stay in effect until you cancel it. Brokers usually restrict the amount of time you may keep an order open (or active) to 90 days.


If you do not indicate an expiration time limit in the GTC directive, the order will normally be established as a day order. This signifies that the order will expire at the conclusion of the trading day. If it is not transacted (filled), you must re-enter it the next trading day.

Take Profit

A take profit order (also known as a profit target) is used to cancel off a transaction at a profit after it reaches a specified level. The position is closed when a take profit order is executed. This sort of order is always linked to a pending order’s open position.

Not all brokerages or online trading platforms support all of these order types. If you do not have access to a specific order type that you want to use, check with your broker.

The Bottom Line

Knowing the difference between a limit and a market order is fundamental to individual investing. There are times where one or the other will be more appropriate, and the order type is also influenced by your investment approach.

A long-term investor is more likely to go with a market order because it is cheaper and the investment decision is based on fundamentals that will play out over months and years, so the current market price is less of an issue. A trader, however, is looking to act on a shorter-term trend in the charts and, therefore, is much more conscious of the market price paid; in which case, a limit order to buy in with a stop-loss order to sell is usually the bare minimum for setting up a trade.

By knowing what each order does and how each one might affect your trading, you can identify which order suits your investment needs, saves you time, reduces your risk, and, most importantly, saves you money.

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