One of the most common questions I get in our Chat Room when stock trading is What’s the difference between market orders and limit orders? There are some trading communities that would shun this question, believing, that if you don’t know the difference between the orders you have no business trading. I’ll be the first to say that this was me. I remember exactly the moment I asked an online forum of traders what a market order meant. They thought I was joking.
Your trading career is a journey just like anything else in life. Everyone starts from somewhere. Some of us are blessed with incredible gifts of chart analysis and others struggle with understanding what an indicator even is. In order to improve your skills you have to practice and education yourself.
It’s important to understand the basics before learning anything else about trading because the basics is how you eliminate unnecessary losses. What I really want to start with though is the difference between Market orders and Limit orders. You might be thinking, “What does it matter? I purchase the stock and I sell the stock.” It definitely matters.
Whenever a trader purchases a stock they are presented with a few options. The first thing your broker is going to want to know is whether the order is purchased at market price or a price set by yourself, also referred to as a Limit order. Before I go into details lets get to know what exactly a market and limit are.
Understanding Market Buy/Sell
Market: Purchasing at the market price means you pay the next available price for that particular stock. If you want to purchase XYZ and you go to your trading platform of choice and just buy it without setting any rules or triggers then it will pay the next available price for XYZ. It’s important to know that by buying market you may be paying more than what the price of the stock is currently listed at.
Here’s an example of a Market Buy:
Jan is wanting to purchase Tesla Inc(TSLA). She see’s that the current price is $319.57. She is okay purchasing at this price so she places an order for 10 shares. However, she notices that the final price she paid per share was $320.88.
This is because there were no other traders willing to sell TSLA for $319.57 or any other price between $319.57 and $320.88. Since Jan agreed to pay the next best market price she ended up paying a higher “premium” to get into the stock right away.
Market Buy = Give it to me now, I don’t care what I pay – I just want in!
Understanding Limit Buy/Sell
Placing a limit order means that you’re wanting to find a position into a stock but you want to make sure you pay a specific price and nothing more. Vice versa when you’re selling your shares the limit order can help you set a price target to sell the shares at. Limit Buys and Sells are the preferred method of most traders. For one, you have control over what price you buy into the stock and when you exit. Secondly, and most important, Limit sells allow you the freedom to “set it and forget it.”
Here is an example of a Limit Buy:
John is wanting to purchase AAPL but he doesn’t want to pay the current asking price of $158.78. Instead he feels like the price is going to have a dip down before a nice spike up. So he sets the limit order to purchase 10 shares of AAPL when the price drops to $157.00
Now, let’s say the order is fulfilled and John has purchased 10 shares of AAPL at $157.00. Now he sets a Limit Sell at $160.00. For a quick $30.00 gain. This allows him to walk away from his trading tools and carry on his normal daily tasks without having to worry that he’s going to miss out on selling.
Limit Buy = I want in on this stock but I can wait for a specific price.
Things To Remember
When there is a market order to buy or sell after hours the order will be fulfilled at open on the next trading day. Be cautious of this because you could find yourself paying a much higher price than before.
There is a downside to placing limit orders. If there is not enough liquidity in the specific stock you are trading you might find that there is nothing to fill the order you placed when the price comes. If you have reached your profit targets it might be best to sell market in this situation.
Limit Orders can be placed after hours. Most of the time they are processed in the order received when the next trading day opens.
Conclusion
Just like with any other strategy in trading there are ways a trader can use the market and limit orders to their advantage. We suggest that everyone get to know the basic trading tools. If you’re using free trading apps like Robinhood then try a limit sell the next time you purchase a stock. Get familiar with the various methods of trading as it can only help you grow as trader and investor.
Good luck and happy trading everybody!
