When an investor places an order to buy or sell a share, there are two fundamental execution options: Placing the order at market price or limit price. The market and limit. A market order instructs to execute the transaction as soon as possible at the current rate also called market rate. A limit order instructs the reverse to execute the order only at or below the buy price or at or above the sell price.
A market order primarily takes care of the execution of the order itself, where the price of the security is important, but less important. Limit orders primarily have to do with the price. If the price of the security at the given time is not within the limits of the limit order, the transaction will not execute.
When you normally think of a transaction in the stock market, you think of market orders. These orders are the most basic buy and sell trades. A broker receives the order and this order is then executed at the current market price.
Although there are higher chances of market orders being executed, there is no guarantee that the order will actually go through. All stock market transactions are subject to the availability of given shares and may vary based on the timing and size of the order.
When a market order is placed, there is always a risk of fluctuation between the time it takes for the broker to receive the order and the time it takes for the trade to be executed. This is especially a concern for larger orders, which take longer to execute, and if these orders are large enough, they can move the market on their own. Sometimes trading in individual shares may be halted or suspended.
Limit orders are designed to give investors more control over the price of their trades. Before placing a buy order, you must set a maximum buy price, and before placing a sell order, you must set a minimum sell price.
The obvious risk of using limit orders is that the order will not be executed if the price of the security never falls within the limit of the order. Another possibility is that the limit price is finally reached, but there is not enough liquidity in the stock to fill the order when it is the order’s turn.
Unlike market orders, limit orders are often allowed outside of the market’s normal opening hours. Limit orders are more complicated to execute than market orders and may therefore result in higher brokerage fees. For low-volume stocks that are not listed on major exchanges, limit orders are the most attractive option, as it can be difficult to find the actual price.