Limit orders are used to set limits on your buy or sell orders. It enables an investor to put a particular quantity and price order. A market order is buying or selling the stock at whatever price the market offers rather than the investor’s preferred price.
Let’s deal with the difference between a market order and a limit order, how they work, and how beneficial they are for traders.
Content:
- What is a Limit Order? – How does it work?
- What is a Market Order? – How does it work?
- Market vs Limit Order
- Quick Summary
What is a Limit Order? – How does it work?
A limit order means putting limits on your buy or sell orders. It helps an investor place an order of a specific quantity and price. For example, if a stock is trading at ₹200 and the investor wants to buy 50 shares of that stock at ₹190, they can place a limit order.
The moment that stock hits ₹195, the order to buy 50 shares at ₹195 will be executed. On the sale side, if an investor places a limit order at a given price, then the stock will not be sold below it.
Limit order depends on demand and supply, and chronology. Let’s say four investors want to buy shares of company X. All these four investors place a limit order at the same price of ₹250.
Investor A places for 10 shares, B for 30, C for 10, and D for 100. This adds up to the demand for 150 shares. On the sale side, two investors want to sell their shares of company X at ₹250. Investor J has 60 shares, and Investor K has 40 shares. This adds up to the supply of 100 shares. This means that there are 50 fewer shares available for sale.
Let’s assume that on the purchase side, A, B, C, and D is the chronology of placing the orders. Meaning that A placed order first and D at the end. So, A gets 10, B gets 30, C gets 10, and D gets only 50 since there were only 100 available for sale. Had investor D placed the order first, all the shares would have gone to investor D, and A, B, and C would have got nothing.
What is a Market Order? – How does it work?
In simple words, a market order means buying or selling the stock at whatever price the market has to offer rather than the price of the investor’s choice. Let’s take an example to understand market order. Investor P wants to buy 100 shares of Company L at ₹50 each. The investor places the order. However, by the time it gets executed by the stock exchange, the prices could have changed, and the investor will get the current prevailing price. The price can be more or less than the price that the investor intended to buy the stock. Also, there can be no change in the price at all.
Therefore, it doesn’t matter if it is a buy order or a sell order. If the investor places a market order, they will get the current price at which the stock would be trading.
Learn about After Marker Order.
Market vs Limit Order
Now that we have established the definitions, let’s find out the difference between a market order and a limit order.
- Market order ensures that your request to buy or sell will get executed.
- In a limit order, this may not be the case as there may be no buyers or sellers for your desired price.
- Market order has no binding on price. Therefore, larger orders can be executed.
- A limit order may not be able to do as there may not be enough buyers or sellers for large orders.
- Limit order helps to trim losses.
- Market order guarantees no such thing. It gets executed at the best price available.
- In a limit order, the investor can return empty-handed due to demand and supply and chronology issues.
- In a market order, the investors will have something in their hands.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to order types, and hence we bring you the other important order types that you should know:
Quick Summary
- A limit order means putting limits on your buy or sell orders. It helps an investor place an order of a specific quantity and price.
- A market order means buying or selling the stock at whatever price the market has to offer rather than the price of the investor’s choice.
- Market order ensures that your request to buy or sell will get executed.
- In a limit order, this may not be the case as there may be no buyers or sellers for your desired price.
- Market order has no binding on price. Therefore, larger orders can be executed.
- A limit order may not be able to do as there may not be enough buyers or sellers for large orders.
- Limit order helps to trim losses.
- Market order guarantees no such thing. It gets executed at the best price available.
- In a limit order, the investor can return empty-handed due to demand and supply and chronology issues.
- In a market order, the investors will have something in their hands.
