Market Order vs Limit Order

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Difference Between Market Order and Limit Order

Market order refers to the order in which one can execute buying or selling the financial instruments on the market price prevailing at that time. At the same time, a limit order refers to purchasing or selling the security at the mentioned price or better.

A market order is an order to buy or sell a stock at the best available price and is usually executed immediately.

On the other hand, a limit order will set the price for buying or selling the stock. However, unlike market orders, the trade will only get executed when the price breaches the level that has been specified.

Difference Between Market Order and Limit Order

Market Order vs. Limit Order Examples

#1 - Limit Order

For example, Mr. A wants to purchase PQR Ltd. shares at $60, currently being traded at $63. Therefore, the limit order is set at $60. Of course, this price can go either up or down. However, as the stock trades at $60, the order triggers, and Mr. A will have to buy at the predetermined price.

Once the stock is purchased at $60 and if Mr. A decides to sell the same once the price reaches $64, a new limit order needs to be set for the same. Once the trade price reaches $64, the order becomes active, putting the new target price. This feature makes limit orders useful in volatile market environments offering an advantage to investors for setting the price.

It will protect from buying a stock too high or selling it at a too low price. One should also note that the trade will not get executed if the stock price does not reach the limit price. They should also factor in the broker’s fee schedule and other charges before considering the price and the possible gains they can make.

#2 - Market Order

Such orders are straightforward to place and depend on the investor's requirement. First, the broker needs to be informed of stock details and quantity, for example, 25 shares of Microsoft Inc. The broker will enter the trade as a market order, and the shares shall be executed at the prevailing price.

Market Order vs. Limit Order Explained in Video

Market Order vs. Limit Order Infographics

Let us see the top differences between a market and limit orders.

Key Differences

A market order is a transaction meant to be executed at the existing/market price as quickly as possible. On the other hand, a limit order sets the minimum or maximum price one is willing to buy or sell. The order gets executed once the price level is triggered.
If market orders are large in numbers, there is a threat of price difference when placed and executed since large orders can be time-consuming. No such issues will exist in the case of limit orders as the buy/sell price is predetermined. However, if the target price is reached in limit orders, there may not be enough liquidity in the stock to fill in the order when its turn comes. As a result, it may receive partial or no fill due to price restrictions.
Market orders primarily deal with the order's execution, with the transaction's speed being more essential than the price. However, limit orders primarily deal with the price, and if the security value is outside the limit order's parameters, the transaction will not occur.
Market orders placed after trading hours will be filled at the market price and open on the next trading day. In contrast, limit orders placed outside market hours are common. In such cases, the orders are put into a queue for processing as soon as trading resumes.
Market orders can have lower brokerage fees, but they may charge higher since limit orders can be complicated to execute.
Market orders are feasible for any stock, but limit orders are beneficial when a stock is thinly traded, highly volatile, or has a wide bid-ask spread.

Market Order vs. Limit Order Comparative Table

Basis of Comparison	Limit Order	Market Order
Meaning	Order to buy/sell stocks at a specific price or better.	Order to buy/sell a stock at the best available price.
Buying or Selling Price	The buy or sell price has to be specified.	One does not have to set the price, and the order is executed at the market price.
Order Submission	Submitted when the price level reaches the trigger price.	The order is submitted and executed instantly.
Stop Loss	One can use it to set stop loss.	One cannot use it to set stop loss.

Conclusion

Both market order and limit order have pros and cons, and the final choice depends on the investor. Though limit order offers a fixed price range cushion, it can be costly. On the other hand, market orders are easy to execute but tricky under volatile market conditions.