Two common stock orders answer different questions: “Can this trade happen soon?” and “What price am I willing to accept?”
Choosing an investment and choosing how to place a trade are separate decisions. The order type tells a brokerage firm what conditions must be met before it buys or sells shares for you. Even if you already understand what a stock-market index measures, a trading screen can be confusing when it asks you to select “market” or “limit.” Here is what those choices actually do.
Market order: execution first, price uncertain
A market order tells the broker to buy or sell at the best price available when the order reaches the market. During regular trading hours it generally executes quickly. It does not mean you will pay or receive the last price displayed in an app. Quotes can change while your order is being routed, and the available shares at one price may be exhausted.
For example, imagine a share last traded at $25. That figure is a record of a completed trade, not a promise that your buy order will execute at $25. If the lowest available offer has moved higher, your order may fill higher. A larger order can even fill in pieces at different prices. This example is hypothetical and is not a current stock quote.
Limit order: price boundary, no promise of a trade
A limit order adds a price condition. A buy limit can execute at your stated price or lower; a sell limit can execute at your stated price or higher. If you enter a buy limit of $25, you will not pay more than $25 per share for any shares that fill under that order.
The tradeoff is that the order may not execute. If sellers are unwilling to sell at $25 or less while your order is active, there may be no purchase. Even a price appearing briefly on a chart does not mean enough shares were available for your order to fill. A partial fill may leave the rest of the order open or canceled depending on its instructions.
Check how long the order stays active
Order type is only one field on the ticket. A day order generally expires at the end of that trading day if it does not fill. A good-til-canceled order may remain active longer, though brokers set their own maximum duration. If you leave a limit order open, review it later: your intended price and circumstances may have changed.
Brokerage menus and policies vary. Before submitting, check the side of the trade (buy or sell), share quantity, order type, limit price if any, and expiration setting. Review the confirmation afterward for the actual execution price and quantity rather than relying on the quote you saw earlier.
Be especially careful outside regular hours
Before the opening bell or after the close, there may be fewer buyers and sellers, wider gaps between bid and ask prices, and sharper price moves. Some brokers allow only limit orders in extended-hours trading. The SEC advises checking whether an unfilled order is canceled or carried into the next session. A market order submitted while regular trading is closed can also encounter a very different price when the market opens, depending on the broker’s handling.
Neither order type removes the risk that a stock’s value will fall after purchase. If the choice on a particular brokerage screen is unclear, read that firm’s order policy before placing the trade.
Sources
This original AskNovus explainer is general education, not personalized investment advice. Featured image: Adam Nowakowski via Unsplash.