Market Order vs. Limit Order: What Is the Difference?

When it comes to investing and trading, it is important to be aware of the different types of orders you can place in the market. Market and limit orders are some of the most common types of orders, and therefore understanding the differences between the two will help you to know when to use each one to your advantage.

In this article, we’ll compare the differences between market orders vs. limit orders, the pros and cons of using each one, and when you should use them.

What is a market order?

A market order is a type of order that is executed at the current price the stock is trading at, and it is often used for fast execution and on highly traded securities. When you place a market order, all you have to do is to determine the number of shares you want, and the order will be filled at the lowest ask if you are buying a security or the highest ask if you are selling.

A market order is executed faster than a limit order because the investor or trader is already accepting the current market price, and therefore the order is quickly filled.

A market order is used when you want fast execution. When you place the order, it will be executed at the price it is trading at that moment. Given that you are accepting the current price, these orders tend to be executed faster than limit orders. 

What is a limit order?

A limit order lets you choose a limit price at which the order is executed, and therefore it might take more time to be filled, but it allows investors or traders to get a better execution at a lower price if they are buying or at a higher price if they are selling.

When placing a limit order, you will be asked to determine the limit and also the number of shares, for example, if you are buying a stock. It is always advisable to use limit orders because it allows you to have more control over the execution and get your order filled at better prices. Especially if you are placing orders on illiquid securities like stocks, limit orders must be used to ensure that you do not get your order filled at a much higher or lower price than what the stock is trading at.

Market order vs. Limit order: Pros and Cons

Let’s compare the advantages and disadvantages of using a market order vs. a limit order:

Advantages of using a market order

The main advantage of using a market order is the fact that the execution is very fast. In fact, if you want to purchase a security right away, the best way to do it is through a market order. A market order is also much more likely to be filled right away as opposed to limit orders.

Disadvantages of using a market order

When you place a market order, there might be a slight delay between your broker receiving the order and processing it. During these few seconds, the stock price might fluctuate. This means that although you have entered the market order at a certain price, it might have fluctuated during the execution. 

This is not particularly worrisome in highly traded securities, but the same does not apply to illiquid securities. There are also experienced traders taking advantage of this and placing orders at much higher or lower prices to take advantage of retail investors that might place a market order on illiquid securities with very low trading volumes. Remember that there might be someone placing a limit order with a price far higher or lower than the current trading price.

Therefore when trading illiquid securities, it is always wise to use a limit order. 

Advantages of limit orders

Despite the execution taking more time, limit orders have several advantages. Since you can set a limit price, limit orders give investors more control over their entry and exit points. Another important aspect is that you can easily place orders when the market is closed. 

Let’s say that you have researched a specific stock, and you want to buy it at a particular price. You can place an ongoing limit order for that stock at that price. If the stock reaches those levels, your order will get filled. This is extremely useful for some investors that are looking to pay a particular price for a certain security.

Disadvantages of limit orders

The main disadvantage of limit orders is that the execution usually takes more time. This can be a disadvantage for some investors who like their orders filled quickly. There is also another aspect, which is the filling. 

Since you set up a limit at which you will sell or buy a particular security, the order might not be completely filled at a certain price. This is what is commonly referred to as a partial fill. Let’s imagine you want to buy 1000 shares of a certain stock at a $10 limit. If someone wants to sell the same stock at $10 but only wants to sell 500 shares, your order will be partially filled. This means you will buy those 500 shares, but you have to wait until someone else wants to sell another 500 shares at the $10 limit price.

When should you use a market order or a limit order?

Even if you are trading highly traded securities, it is always better to use a limit order to prevent getting poor execution or the price from fluctuating. If you are placing an order or a thinly traded security, always use a limit order to avoid the risk of having your order filled at an undesirable price.

While it is always better to use limit orders whenever you are trading, there are some situations where you can use market orders, especially if you just want the order filled right away and you are trading highly liquid securities like large-cap stocks. In this case, a market order can be used without having to wait a long time to get your limit order filled.

Conclusion

Understanding the difference between market orders and limit orders is essential because they are very different from one another, and they should be used in different situations, as we have seen. In general, we recommend using limit orders, as you can always set a limit order to the current market price. 

In a sense, you can use a limit order as a market order. If you really want the fastest execution, you can always use a market order. However, we would advise using only in highly traded securities that have a lot of volumes. You should also make sure that the volume of your order is appropriate for the daily volume of that security.