Buying stocks: market order or limit order?
Are you ready for your first stock trade but aren’t exactly sure which type of purchase order you should opt for? In this article we will review two of the most common stock orders: the market order and the limit order. Several other order types exist but we’ll cover them in a separate article.
The simplest type of order is the market order. It is a request to buy (or sell) a stock at the current market price. The risk of market orders is that you do not control the price at which the order is executed. The transaction will be completed at the prevailing market price when you place the order. The stock market is a very dynamic market, with stock prices going up and down every second. As such, when you insert a market order it doesn’t necessarily mean that you will purchase the shares at the quote you saw just seconds before. Depending on the volatility of the company stock and the trading volume, from the time you decide to place the order to the time it is actually filled (completed), the price could have either appreciated or depreciated. In most cases the purchase price will tend to be very close to the last selling price before you placed your order.
If you decide you want to have more control over the price at which you buy stocks (or sell stocks), then you should consider a limit order. A limit order is a request to buy (or sell) a stock at a certain price. The order will not be filled unless the stock price reaches the price you have set in the limit order. In this case you will either buy the shares at or below the limit price or sell the shares at or above the limit price.
Imagine you have identified a good company with strong fundamentals but the current share price has not yet reached that discounted price (margin of safety) for which you feel it is a good buy. Rather than checking the stock price every day and inserting a market order once it reaches the price you feel comfortable with, you could insert a limit order knowing that the order will be automatically filled if the share price ever goes down to your “limit price”.