Difference Between Market Order and Limit Order 

To maximise your gains and minimise your losses in the stock market, it's important to know the different market order types. Among the most common are limit orders and market orders. Both have distinct features and serve specific purposes in a trading strategy. This guide will help you understand the key differences between a market order and a limit order, helping you make informed decisions when trading.

What is a Market Order?

A market order is an instruction to buy or sell a stock immediately at the current market price. It’s the simplest type of order and is often used when speed of execution is a priority. The main advantage of a market order is its immediacy. Whether you're buying or selling, your order will be executed almost instantly as long as there are willing buyers and sellers in the market. This makes market orders particularly useful in highly liquid markets where stocks are traded in large volumes and prices are relatively stable.

However, the price at which your order is executed might differ slightly from the last traded price. This is because stock prices can fluctuate in the short time it takes to process your order. For example, if you place a market order to buy a stock, the trade will be completed at the lowest asking price available at that moment. While selling, it will be sold at the highest bid price.

How Does a Market Order Work?

When you place a market order, it is sent to the stock exchange where the trade is executed immediately at the best available price. The price at which the trade is executed depends on the bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

For instance, if you want to buy 100 shares of a particular stock, your order will be matched with sellers offering the stock at the lowest price. If there aren’t enough shares available at the best price, your order will continue to be filled at the next best available price until the entire order is executed.

What Should You Know Before Placing a Market Order?

Before placing a market order, it's important to understand that you’re prioritising speed over price. This means that while your trade will likely be executed quickly, the final price may be less favourable than anticipated, particularly in a volatile market. For instance, during significant news events or when trading less liquid stocks, the price can shift between the time you place the order and when it’s filled.

Market orders are most effective in highly liquid markets where large volumes of shares are traded, such as with blue-chip stocks. In such cases, the difference between the expected and executed price is typically minimal. It’s also important to consider that market orders are not suitable for every trading situation. If you’re trading a large number of shares or a stock with low liquidity, the market order might not be executed at a single price but rather at several different prices, leading to what’s known as slippage. Slippage can result in the overall cost of the trade being higher than expected.

What is a Limit Order?

A limit order is an instruction to buy or sell a stock at a specific price or better. Unlike a market order, a limit order gives you control over the price at which your trade is executed. If you’re buying, your limit order will only be filled at or below the limit price you’ve set. If you’re selling, it will only be filled at or above your limit price.

The key advantage of a limit order is that it allows you to specify the maximum price you’re willing to pay or the minimum price you’re willing to accept. This makes limit orders particularly useful in volatile markets where prices can fluctuate rapidly. For example, if a stock is currently trading at ₹ 500, you can place a limit order to buy at ₹ 490. Your order will only be executed if the price drops to ₹ 490 or lower.

However, there’s no guarantee that a limit order will be executed. If the stock price doesn’t reach your limit price, the order remains unfilled. This means that while limit orders offer price control, they might not be suitable if you need to execute a trade quickly.

How Does a Limit Order Work?

When you place a limit order, it’s sent to the exchange where it remains until the stock price reaches your specified limit. If you’re buying, the order will only execute if the price falls to your limit price or lower. If you’re selling, the order will execute if the price rises to your limit price or higher.

For example, let’s say you want to buy a stock currently trading at ₹ 100, but you believe the price will drop. You could place a limit order to buy at ₹ 95. If the price falls to ₹ 95, your order will be executed at that price. If the price doesn’t drop to ₹ 95, your order won’t be filled.

What Should You Know Before Placing a Limit Order?

Before placing a limit order, it’s important to consider the potential for missed trading opportunities. Since your order will only be filled if the stock reaches your limit price, there’s a chance it may never be executed. In a rapidly moving market, the stock price might move away from your limit price and not return, leaving your order unfilled.

Limit orders are best suited for situations where you’re not in a hurry to execute a trade and are willing to wait for a specific price. They’re also ideal when trading in volatile markets, where prices can swing significantly in a short period. However, if you’re trading in a highly liquid market where prices don’t fluctuate much, a limit order might not be necessary.

Additionally, it’s worth noting that limit orders can also be partially filled if there aren’t enough shares available at your limit price. For example, if you place a limit order to buy 1,000 shares at ₹ 50 and only 500 shares are available at that price, your order will be partially filled for 500 shares, and the remaining 500 shares will stay unfilled unless the price drops again.

Market Order vs. Limit Order: Key Differences

Here are the key differences between a market order and a limit order:

Market Order vs. Limit Order: Which One Should You Choose?

Choosing between a market order and a limit order depends on your trading goals and the current market conditions. If you need to execute a trade quickly and are less concerned about the price, a market order is typically the best choice. Market orders are especially useful in highly liquid markets where prices are stable, and trades can be executed almost instantly.

On the other hand, if you have a specific price target and are willing to wait, a limit order offers more control. Limit orders are ideal in volatile markets where prices can fluctuate widely, or when trading in less liquid stocks where the bid-ask spread might be wider. By setting a limit order, you can ensure that you don’t pay more or sell for less than your desired price.

In some cases, you may use a combination of both order types, depending on their strategy. For example, you might place a market order to enter a position quickly and then use a limit order to set a target price for selling. Understanding the differences between these order types will help you make informed decisions and optimise your trading strategy.