What’s a Limit Order, and Is It Better Than a Market Order?


Dec. 15 2020, Updated 9:41 a.m. ET

While trading stocks, commodities, bonds, currencies, and cryptocurrencies, you place an order with your broker. In simple terms, an order is an instruction to your broker to trade on your behalf. There are several types of orders that an investor can place. What's a limit order, and how does it differ from a market order or a stop order?

Article continues below advertisement

The types of orders an investor can place include:

  • Market orders.
  • Limit orders.
  • Stop orders.
  • IOC (immediate or cancel) orders.
  • AON (all or none) orders.
  • FOK (fill or kill) orders.
  • Day orders.
  • GTC (good till canceled) orders.

All of these orders serve different purposes. For instance, in AON orders, your trade would get executed only when the desired number of securities are available. They're particularly useful where volumes are low, such as in over-the-counter or penny stock trading.

Article continues below advertisement

Limit order definition

In a limit order, you instruct your broker to buy or sell the security at a specified price. The trade can be executed only at that price or better. So, in a buy limit order, the trade would get executed at either your instructed price or lower, and in a sell limit order, the security would be sold at the limit price or higher.

Limit order versus market order

In a market order, you don’t specify any price to your broker—the trade is executed immediately. If you place a buy market order, the trade would get executed at the current ask price. Market orders for selling securities are executed near the current bid price. There's not much difference in bid and ask prices for securities where the volumes are very high. However, the bid-ask spread can be wide for thinly traded securities where liquidity is low.

Article continues below advertisement

The basic difference between a limit order and a market order is about certainty. In a market order, you can be certain that the trade will get executed, but this is not the case for a limit order. On the other hand, in limit orders, you can be certain the trade will get executed at a particular price, but in market orders, you don’t have any control over the trade execution price.

Article continues below advertisement

Certainty of execution versus certainty of price

Market and limit orders cater to different needs. If execution is important, market orders may be better. However, if price is more important, go for a limit order.

Short-term traders, who prioritize price, tend to prefer limit orders. Meanwhile, long-term investors, to whom execution is more important, prefer market orders—when holding a security for years, small differences in buying price don't make much difference in your total returns.

Article continues below advertisement

Limit orders versus stop orders

In a stop order, the trade is executed at a pre-specified price. Unlike limit orders, they're not seen by the market. When placing a big order, traders may prefer a stop order because a visible limit order for a large volume can impact the stock's price.

Article continues below advertisement

A stop order is the opposite of a limit order. Whereas in a stop-loss order you instruct your broker to sell the security if the price falls below a specified level, in a limit order, you direct the broker to sell the security at or above a specified level. The purpose of a stop-loss order is to limit your losses.

To sum up, no order type is good or bad—their suitability ultimately depends on your preferences. You can prioritize execution and place a market order or prioritize price and place a limit order.


More From Market Realist

    • CONNECT with Market Realist
    • Link to Facebook
    • Link to Twitter
    • Link to Instagram
    • Link to Email Subscribe
    Market Realist Logo

    © Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.