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INVESTING
SEPTEMBER 27, 2021

What's the difference between market orders and limit orders?

Answered by
Sean O'Brien
Managing Director, Head of Equity Trading, Merrill and Bank of America Private Bank
"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 promptly at the current market price. With a limit order, you're stipulating that you want the transaction only to occur at a particular price or better, even though there is a possibility the order will not be executed.
How do market orders work?
A market order is an order to buy or sell a security at the current market price. A market order typically ensures an execution, but it does not guarantee a specified price. It is executed at the price of the stock at the moment the transaction is presented for execution on exchange or at a dealer. Because there may be, for example, a small delay or other orders may arrive at the point of execution prior to your order, the execution price may be different from the one you saw when you clicked "buy" or "sell."
For instance, if you submit a market order to buy a popular stock you see quoted at $10 per share, by the time that order is executed, even if only moments later, the price may have dropped to $9.90 per share or risen to $10.10 per share. In a volatile market, the price difference could be even more 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 purchase of the number of shares you choose if and when the price falls to your maximum purchase price of $11 or below. If the price never drops that far while your order is in force — 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 purchase won't be made. Limit orders similarly allow you to set a desired price range for the sale of shares you own. If the stock never reaches that price range while your order is in force, no shares will be sold.
The pros and cons of each
Market orders:
  • Pro: They will typically be fully and promptly executed at the prevailing market price when the order is presented for execution.
  • Con: Investors may not know their ultimate execution price when the order is entered.
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 not be executed.
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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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