Market order vs limit order: when to use each | Lightyear (2024)

In the world of investments, an ‘order’ simply refers to an instruction that you place to your broker to buy or sell a certain instrument. There are two main types of order - market orders and limit orders - and understanding when to deploy each is an essential part of any investment strategy.

In a nutshell, a market order directs your broker to buy or sell the security immediately, at the current market price. By contrast, a limit order enables investors to dictate the exact price at which they’d like to buy or sell, and the instruction won’t be executed unless that price is reached.

Let’s go through some examples of each order type, and explore when an investor might choose to use a market order versus a limit order.

A market order is an instruction to buy or sell an asset at the current market price. Investors will typically use market orders when speed is paramount. Orders will be executed as soon as possible, meaning that if they’re created during market hours, execution time can often be a matter of seconds (though it depends on the broker). The tradeoff is that the buyer has no control over the fill price, which could fluctuate between the time they place an order and the moment at which it is executed. This is especially true during the increased volatility of the first few minutes of trading each market day.

There are some caveats to the speed at which market orders are executed. Larger orders generally take longer to fill depending on the available liquidity, while securities with lower trading volumes will generally take a little longer to execute.

Here we start to get a little more complex. Limit orders allow buyers to dictate the maximum buy price, or minimum sell price, of an order. This means that orders will only be executed at the specified price or better, minimising exposure to fluctuating market prices. The tradeoff here is that unlike market orders, which generally execute quickly, limit orders risk never executing if the market price does not reach the specified price.

It may be helpful to imagine a practical example. Let’s say you own stock in a company called Cyberdyne Systems, currently trading at £20 per share. It’s a bull market and Cyberdyne’s share price is rising. Having done your research, you believe the intrinsic value of the company’s stock to be £25, and so you create a limit order to sell your entire holding when this threshold is reached.

In this scenario, a market order could liquidate your holdings below what you felt they were worth. By contrast, a limit order would enable you to keep your holdings in Cyberdyne unless your preferred price was reached.

A stop order is a special type of order which combines certain elements of the market and limit order types. While a limit order allows buyers to dictate a specific price - namely the minimum sale price or maximum buy price they’re willing to accept - a stop order instructs the broker to fill the order at market price but only once the stock has traded through a specified threshold (the ‘stop price’).

Essentially, your stop order becomes a market order once your chosen ‘stop price’ is reached. If the distinction seems unclear, imagine you’re holding a stock which is rising significantly. You don’t want to sell while it’s rising, but are keen to protect some of your unrealised gains, so you create a stop order below the current market price. This way, some of your holdings will be liquidated should the stock begin to fall.

While market orders are typically available for both whole and fractional shares, limit orders can often only be created for whole shares. Check with your broker.

Gauge your risk appetite – market orders may have slippage, especially in volatile markets, while limit orders risk non-execution.

Good investors do their homework, and regularly reassess their investment strategy based on market conditions. Market conditions should inform your choice of order type.

As a Lightyear user, you’ll be able to create market orders, limit orders, and stop orders when submitting buy or sell instructions. Check out our order types FAQ for more information on how to create these order types with Lightyear. You can also create repeat orders if you wish to automate part of your investment strategy.

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