In the investment and trading world, taking the right decisions at the right time is the difference between profit and loss. Central to this is understanding the concepts of limit and market orders. These are the two vital orders that shape the execution of trades.
But what are these orders? Well, this article will delve deeper into the meaning and uses of limit and market orders.
Open Your free Demat Account in just 5 minutes!
A limit order is an instruction given to a broker or trading platform to buy or sell an asset at a specific price or better. While placing a limit order, you set a price threshold at which the trade should be executed.
The cases in which you must consider placing limit orders are:
Long-term investors commonly use limit orders as it helps in acquiring assets at favourable prices, giving you significant benefits in the long run.
If you have a target price in mind and want to ensure you don't overpay for an asset, a limit order can help you maintain price discipline.
Limit orders are beneficial during volatile market conditions, when prices can fluctuate rapidly. It lets you control the price at which you enter or exit a position by setting a limit.
Some of the advantages and disadvantages of limit orders are:
|Limit orders give you precise control over the price at which you buy or sell an asset.||If the market quickly moves in the desired direction, your limit order may not be executed, causing you to miss out on potential gains.|
|Limit orders protect you from sudden and unfavourable price swings by settings a price cap.||Since limit orders require the market to reach your specified price, there is no guarantee of immediate execution, which can be a disadvantage in fast-moving markets.|
|Limit orders allow you to wait for the desired price, giving you more time to reconsider your trading strategy.||Limit orders often get partially filled due to insufficient liquidity in the market.|
A market order is an instruction to buy or sell an asset immediately at the current market price. Unlike a limit order, which sets a price threshold, a market order focuses on executing the trade as quickly as possible.
The cases where you must place a market order are:
Market orders are suitable while trading highly liquid assets, and immediate execution is a priority.
Traders who aim to profit from short-term price movements often use market orders due to their speed and efficiency.
In situations where immediate action is required, such as sudden news or market events, market orders can be useful for prompt liquidation or acquisition of assets.
Some of the advantages and drawbacks of market order are:
|Market orders ensure immediate execution, as they prioritise speed over price.||Market orders do not offer price control, and you may end up buying or selling an asset at a less favourable price than expected.|
|Market orders are more likely to be filled as they work on whatever liquidity is available in the market.||Slippage is a very common factor in market orders. It occurs when the executed price deviates from the expected price due to market volatility or low liquidity.|
|Placing a market order is straightforward, making it accessible for beginners and those who value simplicity.||In illiquid markets or during periods of market manipulation, market orders can be susceptible to unfavourable execution prices.|
Understanding the differences between limit and market orders is crucial for effectively navigating the financial markets. Ultimately, having a clear understanding of both order types empowers you to make informed trading decisions and maximise your chances of success in the dynamic world of finance.