Limit Orders vs Market Orders
The order type you choose determines the price you pay. Here's the difference and when to use each.
📊 MARKET Order
"Buy/sell NOW at whatever price"
🎯 LIMIT Order
"Buy/sell ONLY at my price or better"
Market Orders Explained
A market order tells your broker: "Execute this trade immediately at the best available price." You're prioritizing speed over price.
The price you see when you click "buy" might not be the price you get. In fast-moving markets, the price can change between when you see the quote and when your order executes.
When Market Orders Work Well
- Highly liquid stocks (Apple, Microsoft, S&P 500 ETFs)
- Normal market conditions
- Small orders relative to trading volume
- When you need to exit a position immediately
When Market Orders Are Dangerous
- Low-volume stocks (wide bid-ask spreads)
- During market volatility (earnings, news events)
- At market open (prices swing wildly first few minutes)
- After hours or pre-market
Limit Orders Explained
A limit order tells your broker: "Only execute if you can get me this price or better." You're prioritizing price over certainty.
For buy limits: your order fills at your limit price or lower
For sell limits: your order fills at your limit price or higher
When Limit Orders Are Best
- Any stock with wide bid-ask spread
- Large orders that might move the price
- Volatile markets or volatile stocks
- When you have a specific target price
- Options (spreads are often wide)
Real-World Example
📊 Same Stock, Different Order Types
Other Order Types
Stop Order (Stop-Loss)
Becomes a market order when the stock hits a trigger price. Used to limit losses.
Example: Own stock at $50, set stop at $45. If stock drops to $45, it triggers a market sell order.
Stop-Limit Order
Combines stop and limit. Triggers at one price, executes only at another price or better.
Example: Stop at $45, limit at $44. If stock drops to $45, triggers a limit sell at $44 or better. Protects against selling in a flash crash.
Trailing Stop
Stop price moves with the stock. Set a $5 trailing stop, and if the stock rises from $50 to $60, your stop moves from $45 to $55.
The Bid-Ask Spread
The difference between bid and ask is the spread. This is effectively a cost:
- Apple (AAPL): Spread often $0.01 (tiny)
- S&P 500 ETF (SPY): Spread often $0.01
- Small cap stock: Spread might be $0.10-$0.50 (significant)
- Illiquid stock: Spread can be $1+ (huge)
With a $1 spread, a market order to buy and immediately sell loses $1 per share just to the spread. Limit orders help you avoid paying the full spread.
Best Practices
For Most Long-Term Investors
Use limit orders set slightly above the ask (for buys) or below the bid (for sells). You'll almost always get filled, but you're protected if prices spike.
For Active Traders
Always use limit orders. The savings add up over hundreds of trades. Market orders in fast markets are how traders lose money to slippage.
General Rules
- Never use market orders on low-volume stocks
- Avoid market orders at market open
- Always use limits on options (spreads are wide)
- Consider the bid-ask spread before choosing order type
The Bottom Line
Limit orders give you control. Market orders give you certainty of execution. For most individual investors buying liquid stocks, either works fine. But as trades get larger, stocks get less liquid, or markets get volatile, limit orders become essential.
When in doubt, use a limit order set 1-2 cents above the ask (for buys). You'll almost always get filled, but you're protected if something goes wrong.