Market Order vs Limit Order

All stock market transactions require investors to choose between buying or selling shares. The stock market uses the term order to describe this type of transaction. Investors use buy and sell orders to instruct the stock exchange to perform trades according to their requests.

There are two primary types of orders investors can place in the stock market:

• Market Order
• Limit Order

The two types of orders provide investors with distinct ways to execute their trades because each order type functions differently to handle share transactions.

The market order and limit order functions as two distinctive trading methods which enable investors to choose between fast trade execution or precise price control.

Read more: What are Limit and Market Orders

Market Order vs Limit Order Meaning

Market Order

A market order enables investors to purchase or sell shares when they provide their desired trading volume. The market execution price determines the transaction value which occurs at the moment the order gets fulfilled.

Limit Order

A limit order enables investors to conduct buying or selling transactions while they specify both share volume and their targeted execution price. The order will be executed only if the market reaches that specified price.

Market order and limit order share one fundamental distinction which defines their operational differences.

Read more: Difference between a Market Order and a Limit Order

How Does a Market Order Work?

An investor uses a market order to indicate how many shares they want to purchase or sell. The investor does not select a price for the order because it executes at whatever market price exists at the time.

The process operates through these steps too:

• An investor places a buy or sell order with a broker.
• The order is sent to the stock exchange.
• The exchange matches the buy order with a corresponding sell order.
• The trade happens straight away at the current market price.

Market orders enable investors to achieve their desire for immediate trade execution because this order type delivers instant results.

What You Need To Know About Market Orders

Market orders guarantee fast execution, but investors must understand the following market dynamics:

• The stock market continuously updates its stock price information.
• The process of executing an order needs time between the moment when the order gets placed and the moment when its execution occurs.
• The execution price will show a minor variation from the order price which traders saw at the time they issued their order.

An investor who wants to sell 100 shares needs to set a price of Rs 200 because the share price will drop to Rs 198 before execution occurs.

The difference occurs because stock prices in the market move at high speeds.

How Does a Limit Order Work?

The limit order requires investors to determine both the share quantity and their desired purchase or sale price.

The trade will only take place when the market reaches the predetermined limit price.

For example:

• An investor wants to purchase 10 shares of Reliance Industries at the price of Rs 2,000.
• The current market price is Rs 2,160.
• The order will remain pending until the price falls to Rs 2,000.

Once the specified price takes effect in the market, the exchange will find a seller to complete the trade process.

What You Need To Know About Limit Order Placement

Limit orders offer traders better control over their pricing, but they also introduce specific restrictions.

• The market price needs to reach the selected price point for order execution to take place.
• The trading session will lead to automatic cancellation of limit orders which stay unexecuted throughout the session.
• The execution process depends on the sequence of orders which possess available shares at that moment.

Example

Desired Limit Price: Rs 100

Sellers

• Investor A – 10 shares
• Investor B – 15 shares
• Investor C – 3 shares

Buyers

• Investor D – 25 shares
• Investor E – 10 shares

D's order will execute first because Investor D submitted his order before anyone else and D can obtain shares from both Investor A and B.

Investor E's order might not complete because the available shares total only 3 while E intends to purchase 10 shares.

The execution process occurs through two criteria which establish price precedence and execution time precedence.

FeatureMarket OrderLimit Order

PriceDetermined by marketSpecified by investorExecution SpeedImmediateOnly when price condition is metPrice ControlNo control over final priceFull control over priceExecution GuaranteeHigh probability of executionExecution not guaranteedBest Used ForQuick tradesPrice-specific trades

Market Order vs Limit Order: Which One Should You Choose?

Investors must select between market orders and limit orders based on their specific trading goals.

Market Order

Market orders enable investors to execute their trades instantly while they disregard minor fluctuations in price. Long-term investors use market orders to enter and exit their investment positions without delay.

Limit Order

Active traders who desire to purchase or sell stocks at precise market prices should use limit orders. These orders have become popular among investors who trade in unstable markets because they enable better management of their trading prices.

Investors must learn about stock market operations and associated dangers before they can execute trades with any order type.