The activity of purchasing or selling a stock in capital markets is essentially termed an order. More specifically, it is referred to as a buy or sell order. When making a transaction in the share market, you can place two types of orders: market order and limit order. These two approaches to buying and selling shares depend on what kind of investor you are and what type of trade you may want to bet on.
In this article, we will explore the key differences between a limit order and a market order to strengthen your basic knowledge, which can help streamline your investment strategies.
Market order vs limit order
Market orders are buy or sell orders, which require investors to include solely the quantity that needs to be bought or sold and the price for it is decided on the basis of the current market prices. On the other hand, with limit orders, investors stipulate both the quantity and price, and the order is only materialised when the market price matches the expected rate.
Additional read: After market orders
How do market orders work?
Market orders are the most common form of orders placed at the exchange. Also, it is the default selection on the transaction pages of almost all online broker platforms. Usually, such orders are preferred for purchasing or selling large-cap stocks, ETFs, or futures.
For a market order, the stock quantity bought and sold is predetermined, not the price. The transactions involving such orders are underpinned by live market prices. Typically, investors monitor the movement in share prices for weeks, sometimes even months, for the stock to attain the ideal price. When an order is placed for a stock, it reaches the exchange. Then, the stock exchange aligns the buy order with a corresponding sell order, and the transaction manifests. In a market order, there is some level of risk for both the buyer and the seller.
It is possible to experience a delay of a second or more between placing an order and its execution. Therefore, the execution price of the order may vary from the initial placement value as stock market prices are rapidly changing. For instance, you place a sell order for 1000 shares when the market price is Rs. 300 apiece, but by the time it gets fulfilled, you may notice that the price of the single share falls to Rs. 299.
Additional read: IOC in share market
How do limit orders work?
While placing limit orders, you have to indicate the price at which you want to buy or sell alongside the quantity. Such orders will only be processed when the desired price is realised. This price feature is the key distinction between a limit order and a market order.
Let us assume you want to buy 100 shares of Company XYZ Limited at Rs. 350 apiece. Your order will be placed with the stock exchange after you specify the quantity and price but will only be fulfilled when XYZ’s share value secures the price spelt out in the limit order. If the perceived stock price is trading at Rs. 400, the limit order will not be executed. The order will be authorised only when the stock price tamps down to Rs. 350.
If the stock price fails to achieve the prescribed share value in a single trading session, the limit order will be rescinded by your broker. If multiple investors place orders for different quantities at Rs. 350, orders will be fulfilled by the exchange on a first-come-first-serve basis, i.e., in the order of chronological ascension. It is integral to note that limit orders do not demonstrate a 100% success rate.
Limit orders are chosen when the transactions are related to thinly traded or extremely volatile securities. Therefore, they are typically used by day traders who want to earn profits by buying or selling large volumes of stocks to capitalise on the small price fluctuations occurring throughout the day.
A summary of differences between limit orders and market orders
Limit orders |
Market orders |
Both the quantity and price need to be determined in advance |
Only the quantity needs to be mentioned |
Transactions will occur when the price stipulated by the investor is realised |
Transactions are contingent on live marketplace prices |
Closing thoughts
Limit orders and market orders have contrasting strategies and outcomes, which heavily influence their respective merits and limitations. Market orders are useful when you want to buy or sell shares quickly based on the prevailing market economic climate and not on predetermined prices. Moreover, such orders are best suited for individuals seeking long-term investments and are not concerned with the day-to-day market price movements.
Conversely, limit orders are a right fit for seasoned traders who want to exploit the short-term market volatility and book profits for their portfolio accordingly. Such orders are dynamic and nuanced in nature, so they need a higher level of expertise and insights. Irrespective of the type of order you use, it is critical that you exercise due diligence by examining the current market trends to earnestly comprehend the risks and rewards of your decisions.
