Limit or Market Order: Which One Should I Choose?

Q: When I buy a stock, how do I know whether to choose a market or limit order?

A: When you place an order to buy or sell a stock, you have two main choices: a market price order or a limit price order. A market order means you want to buy or sell immediately at the best price available, while limit orders allow you to set parameters for price and time. How do you decide which to use? It largely comes down to personal choice and investing style. But to help you make the right choice, here's how they each work.

Market Order

A market order is a buy or sell order that's executed at the best available price. This type of order would generally be filled right away — as long as there are willing sellers or buyers at the other end of the transaction. Market orders placed after trading hours would be filled at the best available price when the market reopens. Since a lot can happen outside of regular trading hours (pre- and post-market), that price could be significantly higher or lower than when you entered your market order. There are also times when a stock is halted or trading is suspended, due sometimes to pending news, which could delay the execution of your market order.

Limit Order

A limit order, as the term suggests, sets price and time limits on the purchase or sale of a stock. You can set a maximum purchase price for a buy order, or a minimum sale price for a sell order. Your order will only be filled at the price you specified or better. You can also choose your "good through" date, which is when the order will expire unless it's already filled or you decide to cancel it.

When buying...

Let's say you wanted to buy shares in ABC Company, which is trading at $10.50 on November 1. You may be interested in the stock, but prefer to purchase it at lower price and are willing to wait a month to see if it will fall to the level you want to pay. A limit order would allow you set the maximum price you're willing to pay and choose a cutoff date up to 90 days in the future. For example, for those shares of ABC Co. you're interested in, you might set a limit order to buy at $10, good through November 30.

When selling...

Now let's say you already own shares of ABC Co. (which you bought at $10), and want to sell when they hit $12. You can set your limit price at $12 and choose your "good through" date, meaning that if ABC rises to $12 or more within that timeframe, your order would be filled as long as there are enough willing buyers or sellers at the other end of the transaction. 

Pros and Cons

Market Orders

Pro: Market orders can generally be expected to be filled right away.

Con: With market orders, it's important to keep in mind that the final price could be different than what you were expecting.

Limit Orders

Pro: You have better control over the price and you can change it — as long as your order hasn't been filled — until markets close on the day your order expires. For OTC or thinly traded securities in particular, limit orders offer greater certainty on your fill price.

Con: Execution of a limit order is less certain of a fill than a market order. There is risk a limit order won't be filled, or will only partially be filled. And, if you've placed a limit order outside of market hours, your order may not get filled if the stock price opens higher than your limit buy price or lower than your limit sell price.

Keep in mind: In both cases, there must be enough buyers or sellers to fill your order.

Find out more in our Guide to Investing in Stocks.