Learn with ETMarkets: Understanding Market Orders and Limit Orders
Sometimes the distinction between these order types can become blurred, making order execution a difficult task.
In this discussion, we will look at the different options available to investors for order execution, with a particular focus on market orders and limit orders.
What is a market order?
Simply put, a market order is to purchase a specific stock, bond, or other tradable asset at the best price when placed in a Demat account or placed through a broker.
In most cases, this highest price will match the current market price displayed in real time.
For example, if the live price of ‘Stock A’ is Rs 542 and you place a market order to buy it, the trade will be executed very close to this price, considering the liquidity of the asset.
Market orders are the default choice offered by brokers to investors, especially when the investor expresses his/her willingness to urgently buy a particular stock and pay the current market price.
What is a limit order?
In contrast, a limit order involves specifying a specific price at which an investor should buy or sell an asset. This designated price is the ‘limit price’ and is different from the current market price.
Importantly, a trade may or may not be executed depending on the convergence of the current market price and the limit price set by the investor. Limit orders are generally preferred for purchasing assets with high volatility or low trading volume.
For example, considering the same ‘Stock A’ whose current market price is Rs 542, if you place a limit order to purchase it at a limit price of Rs 535, two scenarios can unfold.
If the stock price touches an intraday low of Rs 537 and then reverts to a new high of Rs 560, the trade will expire without being executed. On the other hand, if the stock touches Rs 535 during the day, the limit order will be executed immediately.
Which is better?
Both market orders and limit orders have their pros and cons and their usage depends on a variety of factors.
Market orders can be placed in the following cases:
• You want your orders to be executed quickly.
• You are trading a liquid asset with a narrow bid-ask spread.
• Volume is not very high.
Market orders are suitable when urgency is paramount and the asset is easily tradable so that the trade can be executed close to the current market price.
You can avoid market orders if:
• Trades are being executed on illiquid assets.
• During highly volatile market conditions.
Market orders are less reliable for illiquid instruments or when market volatility is high. Widening bid-ask spreads can result in execution at undesirable prices. In such cases, a limit order is a better option.
You can place a limit order in the following cases:
• I want to purchase an asset at a certain price.
• You are dealing with assets with high bid-ask spreads and low liquidity.
• You are trading large quantities of stocks.
Limit orders are suitable when you have a predetermined price level in mind and are advantageous for assets with high bid-ask spreads, preventing unwanted price filling.
You can avoid limit orders if:
• It is inconvenient for orders not to be executed.
• You don’t want to do partial transactions.
Limit orders may result in missed opportunities or partial execution, so market orders are more appropriate in these situations.
Other order types
Apart from market and limit orders, popular brokers in India also offer a variety of order execution types, including stop-loss orders, valid until triggered orders, and after-market orders (AMOs), each suited to a specific purpose.
conclusion
To avoid confusion, investors can focus on market orders and limit orders to understand their pros and cons. These orders should be selected based on the urgency of the trade and the liquidity of the asset.
Exploring different order types through practical implementation of microtransactions will help investors understand their functionality and use them effectively in the future.
Note: This article is provided for informational purposes only. This is not investment advice.
(The author is Vice President of Research at Tezimandi)
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(Disclaimer: Expert recommendations, suggestions, views and opinions are their own and do not represent the views of The Economic Times.)
