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What is the difference between a limit and market order?

Hey, this is Sasha Evdakov, founder of traders fly, here to answer a few of your frequently asked questions in detail.

Today’s question is “What is the difference between a limit order and a market order? And when should you use one or the other?”

Market order

Think of a market order as paying the market price when buying or selling a stock. Meaning you would pay whatever amount is necessary to get your shares.

The example I always like to use when talking about a market order or a market price is when you go into a restaurant. And they say, the market price on a fish, and you’re going to pay whatever that current rate is to get that fish. To get that fish sandwich, to get that order completed.

Limit order

When it comes to a limit order, you get to specify the price you want to pay for the stock. You get favorable pricing, but you may not get filled with your order if your price is not met.

Take a swordfish steak as an example. Maybe your limit price is $9, and if it is more than $9, then you’re not going to buy that swordfish stake per pound. In either case, that’s the difference between a market order and a limit order.

Applying the knowledge

Let’s take a look at using this knowledge on the charts.

Here, if we have Amazon, you can see Amazon right now is at $626 per share.

If we look at the dashboard, and we were interested in going in to trade Amazon, we were looking to buy that stock, I can go ahead and right click and buy this stock. Now you’ll see this order populate into a market order.

In here I can do a limit order. There’s also stop, stop limit, trail stop. There are a few other order types, but the basic request is a market order, and you see that the price is the market price.

Right now the market is closed. But once the market opens up if I went ahead and placed this order (right click and confirm and send), I would get filled at whatever the current price is for that stock.

Currently, we are trading right around between $627 and $629 between this mid-price and natural price. Somewhere in the middle is where I would get filled.

If the stock jumps to $655, then I may actually get filled at $655, at a much higher price than what I expect.

This is very different than when you compare this to a limit order. So I put a second order type, and let me change this to a limit order.

Here you can see the price now. The price gets changed into an amount that you can actually manually type in, and I can move this price down a bit. Or I can move it up a little bit. If I move it down, I can get filled at a much lower price, and try to nibble a little bit cheaper into that stock price.

There is also another scenario. If I wanted to get filled a little bit less, try to see if I can negotiate my way and get a lower price. Then I may be able to get that lower price.

Unfortunately, because it’s a limit order, that’s the most I’m willing to pay. I may not get filled on this if the stock price continues to run higher, because my limit order is $627.83.

If the stock price went to $630, then went to $635, then went to $640, I would have to continue to shift this limit order higher and higher to get filled. I have to chase it.

When should you use market order or limit order?

When do you use one of the other? Well, a market order is excellent if you need to get into a stock right away, really fast, typically day trading, and you’re trading liquid stocks.

However, typically I will still use a limit order for me, it’s just, I will set the limits a little bit higher or beyond it.

Here’s the natural price for example. Then I’ll go ahead and bump it up a few pennies more because my goal is just to get filled. Even if I want to get filled very quickly, so I bump it up a few points. But I don’t want to pay extreme prices, because this at least limits me, even though the current price is at $620 here, and the high is $629. Even though I might be willing to pay $630, $631, I could set a limit order to $630, $631. But that way, if I set it at a market order, I may get filled at $635, $637. That way the stock price can run up on me.

My personal opinion

For me personally, I still prefer to use limit orders. It’s just I will set them a little bit higher on the limits if I’m doing a little more active trading. But in general, I prefer to limit order. That way you don’t get burned, because the same thing happens when a stock is moving to the downside.

If you’re looking to sell the shares, you also have the same concept of limit and market orders.

You want to make sure that market orders are great for liquid stocks, stocks that trade very heavily. And you need to get in and out right away very quickly, but in a limit order, you get to specify that price. Whereas with the market order it can run up or run down on you in any direction. Be careful.

In the same situation when you’re talking about selling stock. With a limit order, you’re able to sell it at a higher price and play around and bump around the prices to try to get a little more favorable pricing.

That’s the difference between a limit and a market order.

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