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In this article, we will be covering the difference between entering a "market" order or a "limit" order. The most important distinction between the two methods is that a market order guarantees an execution of your trade regardless of the price of the stock and a limit order will execute only when the price of the stock reaches a preselected execution price.
You might be asking yourself, "So what's the big deal?" While most stocks move slow enough (their price change very slowly over the course of the market day) to allow the use of a market order, you might find yourself very surprised if you use a market order to buy or sell a stock with a fast moving market (this means that the price of the stock changes very rapidly over a short period of time). If you use a market order, the price of a stock can change tremendously during a fast moving market before your order can get executed. Why? Because market orders are taken and filled (executed) in the order received. If there are hundreds or thousands of orders coming in almost simultaneously, your trade could be executed many minutes after you entered it. You could get an execution price that is significantly different from the price quoted you at the time you placed your order. MsFiscallyFit has a friend whose market order, placed on a stock with a fast moving market, was executed over $30/share higher than when it was entered. A market order says, "When it is my turn, execute me at the current price of the stock no matter what the price is". Remember a market order guarantees an execution regardless of price.
In a fast moving market, you might find using a limit order to protect the price execution of your trade. With a limit order, you can set the maximum price at which you will pay to buy the stock or the minimum price you will accept if you are selling the stock. Limit orders do not guarantee an execution. If the price of the stock is above the price that you are willing to pay or below the price that you willing to accept, then the trade won't execute. Limit orders give you price protection. Too bad we can't buy clothes this way!
Here is an example of how market and limit orders work, both buy and sell, for an order of 100 shares of XYZ stock.
Market Order - 100 Shares Of XYZ Stock
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Order Type
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Current Price
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Execution Price
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Buy
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30 - 1/8
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30 - 1/8
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Sell
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30 - 1/8
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30 - 1/8
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Limit Order - 100 Shares Of XYZ Stock
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Order Type
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Current Price
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Limit Buy Price
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Execution Price
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Buy
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30 - 1/8
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29
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Did Not Execute
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Buy
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30 - 1/8
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30 - 1/2
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30 - 1/8
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Order Type
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Current Price
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Limit Sell Price
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Execution Price
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Sell
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30 - 1/8
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29
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30 - 1/8
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Sell
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30 - 1/8
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30 - 1/2
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Did Not Execute
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With limit orders, you must specify the length of time that your order will remain open (executable). Usually, you will be able to select either "Good For The Day" or "Good 'Til Canceled". Good for the day means your order remains open for the length of the current trading day unless executed. Good 'til canceled means that your order remains open for the current trading day and each successive trading day until you cancel it or the order gets executed. Using limit orders is another way you can protect yourself while making your fortune trading online.
Next in our series Learning To Trade Online is
"The Long And The Short Of It"
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