What an Investor Should Know About Limit Order and Market Order

1. What an Investor Should Know About Limit Order and Market Order As an investor, you have two primary ways of placing orders for the purchase or sale of stock with your broker. You can go for either a limit order vs market order. These two alternatives of placing a stock trade basically guide your broker on how the trade is to be conducted for you. Placing the right kind of trade can be a money saver for you and can even go further to help you earn extra money on the stock you trade. If you place a market order, you end up trading your stock at the going price for the stock. On the other hand, if you go for a limit order, you decide the price at which you want your stock traded. That forms the basis for Limit order vs Market order and it is important to understand both the options so that you can select the best-suited option in any trading situation. Limit Order Vs Market Order Source: theofy.world

2. To get an understanding of Market vs. Limit order, it is essential to first understand the two individually and what advantages and disadvantages they bring to you as an investor in different situations. What Is Market Order? Source: merriamwebister.com Simply put, a Market order is an order to sell or buy a stock at the best possible present market price. It is in a way, an instruction to your broker to sell or purchase security instantly after the order for the same is placed. However, in the case of a Market order, the success and price of the order are not assured. It is majorly dependent on the security that you are trading and the current market situation. You should know that Market orders are not accepted for halted or suspended securities and will not be accepted beyond the trading hours. As an investor, if the price of the stock does not matter to you as much as entering or leaving the market immediately, you should go for Market orders. A Market order guarantees that your stock trade will get completed surely.

3. For investors who simply want to buy and hold stock as a long-term investment or have lost confidence in a particular company and wish to exit a losing position immediately, Market orders are the best option. However, you have to also understand that when you place a Market order, you have no control over the amount of money you end up getting from the sale of a stock or the price you will have to pay for its purchase. Advantages of Market Order ● Market orders are of great importance when the time of purchase or sale of stock is crucial to your trade and rules above the price paid or value received for it. ● You are not required to make any calculations while placing a Market order. For purchasing shares, all you need to do is state the amount of money you wish to invest in that stock and you get the exact shares for that money. Similarly, when you sell stocks, all you need to do is enter the number of shares you wish to sell. ● The bid and ask price of the stocks for big companies are usually only a penny or so apart, making their stocks very liquid. Thus if you are trading in stocks of big companies, Market orders can fetch you the last quoted price for them, depending on the current market situation. ● In case you are trading a small number of shares on large stock, Market orders are a better option for you as in this case, the price is less likely to move for the stock. ● When you place Market orders, you can sell and purchase fractional as well as full shares. ● Your trades are carried out instantly, thus Maret trades are fast. Disadvantages of Market Order ● There is a possibility that you may end up getting a price very different from the ongoing market price if you use a Market order but do not check the ask and bid price for the stock. The possibility of this happening increases for smaller stocks or thinly traded stocks. ● Suppose you enter a Market order trade beyond the trading hours, your order will be executed the next day during the trading hours. Let’s say an

4. important market-related news surfaces in the interim time period and you do not cancel the trade, you may end up getting a wild price, much different from what you had anticipated. What Is Limit Order? Source: theofy.world If the price at which you buy or sell a particular stock is of grave importance to you, you should go for Limit stocks. For a Limit order, you tell your broker to purchase or sell your stock at a stated price or a price higher than it in case you are selling a stock, and lower than it, in case you are buying a stock. As an investor, you get higher control over your trades’ purchase and sale price when you opt for Limit orders. When you go for a Limit order, you need to select a maximum purchase price amount acceptable to you, before placing an order for purchase. Alternatively, you need to select a minimum sales price acceptable to you, before placing an order to sell.

5. When you are trading in a thinly traded and high volatile stock or stocks that may have a wide bid-ask spread, a Limit order is of great advantage. It assures you that the entry and exit point matches the specified price for a trade. Limit orders, as the name suggests, put a limit or a cap on the amount of money an investor is ready to pay. Let’s say you wish to buy stocks for a particular company but a price lower than the current price, you can go for a Limit order on that trade. Any time during the day, when the price of the stock falls to the specified limit order price or lower, your order will be processed. If the price fails to go as low as the Limit order, the order will be canceled automatically. The order might also not get executed even if the price of the stock reaches the Limit order, if there is a shortage of liquidity in the stock by that time and lead to no fill or partial fill of the stock for you. Source: elcomercio.com

6. Advantages of Limit Order ● Limit orders are an ideal tool when you are very specific about a particular price for a stock and would not execute the trade unless that price or even better one is reached. ● You have a choice to decide the time when your order expires. This can be any day up to 90 days in the future. ● When you are trading in thinly traded stocks, setting a Limit order is of great advantage to you to minimize the cost you will have to bear for it. This saving may go up to even 1% or more of your total investment in such cases. ● The price at which you buy or sell the stocks is mostly safe from the effect of market fluctuations. ● Another situation where a Limit order is useful is if you are selling a large number of stocks. For a large number of stocks, even a slight variation in the price can amount to a lot of money, thus Limit orders can save you from probable losses. ● In a situation where you do not want to reduce your profit by moving the market a lot, a Limit order is a better choice than a Market order, which brings a higher shift in the market. Disadvantages of Limit Order ● Since you are specifying the price for your trade while placing a Limit order, you may have to wait for an unspecified amount of time for the stock to reach that price. Due to the same reason, there is also a possibility that your trade may never end up getting executed. ● You can only place Limit orders for full trades and not for fractional shares. ● A Limit order you place on a trade can be valid for up to three months in the future, thus you may forget about the trade and it gets suddenly executed one day, then the price is reached. Though you end up getting the price of your choice, you may not have a desire to go ahead with that trade anymore for other reasons. ● Until cancelation or expiry, the complete amount of money is instantly deducted from the balance available to you.

7. ● Since your order is price-dependent, it may never get fulfilled if the price is not reached in the specified time period. Source: gowatertown.com The Conclusion The difference between Market order and Limit order is primarily based on how they are executed. The specific circumstances of the trade will help you decide which type of trade you should go for. In case your priority lies in completing the trade, you should go for a Market order but if your focus is on a specific price for the purchase or sale of a stock, you should go for a Limit order. If you are new to the world of market investments, a study of Limit order vs Market order will help you make optimum trading decisions and would help you make more money on your investments.

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