"Orders" are directions investors can give to a brokerage to buy or sell a stock, bond or other financial asset. When you place a market order, you are asking to buy or sell immediately. With a limit order, you're stipulating that you want the transaction to occur at a particular price (or at a better one, if possible).
How do market orders work?
Because the transaction occurs immediately, market orders can be placed only when financial markets are open. They are executed at the exact trading price of the stock at the moment the transaction goes through. Because there is a time lag between your decision and its execution, this price may be different than the one you saw when you clicked "buy" or "sell."
For instance, if you submit a market order to buy when you see a stock priced at $10 per share, by the time that order is executed a few seconds later, the price may have dropped to $9.75 per share or risen to $10.25 per share. In a
volatile market, the price difference could be significant.
How do limit orders work?
Say you want to buy a particular stock at $11 per share or less, and it's currently trading at $12. A limit order will execute a sale for the number of shares you choose if and when the price falls to $11 or below. If the price never drops that far — or, if it's in your range when you submit the order but moves above $11 before the transaction is accepted and stays there as long as your order is in force — the sale won't go through. Limit orders also allow you to set a desired price range for the sale of shares you own. If the stock never reaches that price while your order is in force, no shares will be sold.
The pros and cons of each
Market orders:
- Pro: They will always be executed at whatever price an asset happens to be trading at.
- Con: Investors may not get the exact price they want when buying or selling an asset.
Limit orders:
- Pro: They allow investors to make sure they don't pay more than they want for an asset, or sell it for less than desired.
- Con: Because of the price limits, investors run the risk that a purchase or sale will never be executed.