Introduction

Trading in the stock market entails buying and selling of stocks, and each decision significantly impacts your investment journey. When you place an order to buy a stock, it is called a ‘buy order’, and when you place an order to sell a stock, it is called a ‘sell order’. The process of executing trading orders on the stock market is called stock orders. There are two types of orders in stock market, they are:

• Market Order

• Limit Order

Both these stock orders represent two distinct approaches for buying and selling shares. If you want to understand how each of these stock orders affect your trade, read on.

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Market Order 101

When you place a buy or sell order on the stock market by mentioning the quantity you want to trade, it is called market order. In this trade, you don’t trade based on the price of the stock but go by the number of stocks you want to trade. You can place a market order by simply placing an order for the quantity of shares at the current market price. To get market orders at a low price, you would have to monitor the price of the stock and once it reaches your desired price, place an order to buy a lot. The order gets placed on the exchange, and you will be able to buy the stock only when the stock exchange is able to match your buy order with another investor’s sell order.

Example of Market Order:

You place an order to buy XYZ company’s 100 stocks, the market price per stock is ₹125. The exchange now looks for a seller who is selling these shares at the best price. There are two sellers each selling 60 shares of the same stock at ₹125 and ₹122 respectively. As per the instructions of the market order, you get to buy the shares at the best available prices. In this case you will be assigned 60 shares at the lowest available price of ₹122 and then the remaining 40 shares will be purchased at the next best price of ₹125.

Your total order for 100 shares of XYZ company would be (122 x 60) + (125 x 40) = ₹12,320.

Advantages of Market Order

• Simple to execute orders, therefore easy for novice investors to trade.

• No uncertainty for order execution as you will be able to trade as long as buyers and sellers are available in the market.

• Trades are executed at market price, so you don’t miss time in the market, especially in a bullish market.

Drawbacks of Market Order

• Since there isn’t a fixed price attached to the trade, you may buy at a higher rate or undersell your stock.

• Market orders are prone to slippage, which happens whenever the executed price differs from the intended price owing to market conditions. This variance might cause unanticipated losses, especially in volatile markets.

Limit Order 101

When you place an order for a particular stock on the market by mentioning the quantity you want to buy/sell and the price you want the order executed at, it is called a limit order. This stock order will be fulfilled only when the market price hits the specified rate, giving you more control over your trade.

Example of Limit Order

You place an order to buy ABC company’s 100 stocks at ₹250 per stock, estimated at ₹25k for the entire trade. Currently, the stock price for ABC is at ₹255. The exchange will not be able to execute your order until the stock price reaches your desired price of ₹250. If the stock doesn’t hit the desired price by the end of the trading session, your stock order can be cancelled (in case of an intraday order), and you will have to place a fresh order on the next trading session. In case of a good till cancelled (GTC) order, you will have to wait until the stock reaches your desired price.

Advantages of Limit Order

• Since your orders are price based, you avoid paying more or selling at a discount, especially in fast-moving markets.

• You can place orders during regular, pre, or post trading hours.

• You can plan explicit entry and exit points based on your desired price.

Drawbacks of Limit Order

• Stock order gets cancelled if you don’t get a trade at your desired price.

• If there are insufficient shares available at your pricing, just a portion of your order may be fulfilled.

• If your target price is too low and thereby your order is not executed, you stand to lose potential profits, especially if your desired stocks reach market highs.

Key Differences Between Market Order and Limit Order

Conclusion

When you are placing stock orders, you face a crucial decision: should you opt for the quick execution of market orders or the price control offered by limit orders? Every choice you make carries its own advantages and considerations that can greatly influence your trading outcomes. Market orders are meant for you to execute immediately at or near the current price. This makes you a great choice for purchasing major stocks, especially when your priority is on swift performance rather than securing a specific price.

Limit orders offer you price protection by executing only at your specified price or better, but there's a chance they might not fill at all. When you’re choosing an order type, remember that there’s no one-size-fits-all solution. The best alternative is ultimately determined by your unique risk tolerance and the trading method you use.