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How to Use Limit Orders As Market Orders

Introduction

  • With the growth of online trading platforms, it has become crucial to learn about different order types to develop investment strategies.
  • 'Limit orders and 'market orders with their unique features are among the most commonly used orders. 
  • Let's learn about these order types and explore how you can employ a limit order as a market order. 

What is a Limit Order?

  • A limit order enables the sale or purchase of a security at a specific price or better.
  • Limit orders let you determine the maximum price you need to pay while purchasing or the minimum price you are ready to accept while selling. The order will be fulfilled only when the market reaches your specified price or above.
  • Let's take an example: You wish to sell 20 shares of Infosys Ltd., currently trading at Rs. 1000 apiece, at Rs. 1050. You can place a limit order to sell 20 shares at Rs. 1050. If the share price reaches or exceeds Rs. 1050, your order will be executed, and your shares will be sold at that price. However, if the market price does not reach Rs. 1050, your order will remain incomplete until you cancel it.

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What is a Market Order? 

  • A market order refers to the request made by a trader to buy or sell a security at the best available price on the market.
  • Unlike a limit order, it prioritises speed of execution over price. When you place a market order, you are prepared to purchase or sell the security promptly, irrespective of the current market price.
  • Let's take an example:  You want to sell the shares of Infosys Ltd. and the current market price is Rs. 1200 per share. When you issue a market order, your broker will execute the trade to sell your shares at the existing market price. 

How Can Limit Orders Function as Market Orders?

  • Setting the limit price extremely close to the market price is the key to employing limit orders as market orders.
  • To use a limit order in a market order, you can:
  1. Set the limit price higher than the last traded price (LTP) for a buy order.
  2. Set the limit price lower than the LTP for a sell order.
  • This way, the limit order will be executed like a market order. You will still have some control over the price and are more likely to get an instant execution.

Let's understand through an example.

  • For 'buy' limit orders: 

  1. The current market price of Infosys Limited is Rs. 1025 per share.
  2. A buy limit order is placed at Rs. 1050, which is higher than the prevalent market price.
  3. Since the buy limit price of Rs. 1050 is above the market price of Rs. 1025, the order will function as a market order and execute immediately.
  4. All available quantities up to Rs. 1050 will be purchased.
  • For 'sell' limit orders:

  1. The current market price of Infosys Limited is Rs. 1080 per share.
  2. A sell limit order is placed at Rs. 1060, which is lower than the current market price.
  3. As the sell limit price of Rs. 1060 is below the market price of Rs. 1080, the order will act as a market order and will be executed instantly. 
  4. All available quantities up to Rs. 1060 will be sold.

What are the Benefits of Using a Limit Order as a Market Order?

  • Price control: Using limit orders as market orders allows you to stipulate the maximum and minimum transaction prices. This provides protection from unfavourable pricing.
  • Reduced slippage: Limit orders, when used as market orders, help mitigate the risks of slippage, particularly in volatile markets. 
  • Flexibility: Integrating the flexibility of market orders with the price control of limit orders facilitates swift market entry or exit, allowing for responsive trading strategies.

What are the Potential Risks?

  • Using limit orders as market orders carries the risk of non-execution if the market price fails to reach the set limit price.
  • Additionally, in volatile markets, there is a possibility of receiving only partial fills, particularly for larger orders.

To Wrap Up

  • Incorporating limit orders as market orders can upgrade your investment strategies, providing them with more precision, control, and flexibility.
  • To optimise your trading outcomes, it's important to analyse market conditions diligently and set appropriate trigger prices.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account 

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