Types of orders: market order vs limit order

If most of what you know about stock trading comes from pop culture, you might think the activity is as simple as clicking on a buy or sell button. If you have delved into the matter more, you might be overwhelmed by the sheer variety of orders and the opaque jargon to describe them: fill or kill, stop-limit order, good ‘til cancelled. But two main types of orders are the bread and butter of every trader: market orders and limit orders.

Market orders are the most straightforward. They simply tell the broker to buy or sell a security immediately at the current market price. The focus for this order is speed rather than price. In the time it takes to execute the trade, the security may have changed in price since the last time it was transacted, but the trade will move forward regardless at whatever the current going price is.

Market orders are the most likely to be filled, but they are not guaranteed to be filled because there is not always a supply of the security (for buyers) or demand for it (for sellers). More liquid stocks are more likely to be filled quickly and at a price very close to the bid/ask price.

Limit orders are designed to ensure specific price conditions rather than an immediate transaction. The risk is that the order might not go through, but the advantage is that you can be sure the price will align with your goals when it does. There are four types of limit orders:

1. Buy limit order: the order to buy a security will only go forward at or below a certain price specified by the trader.
2. Sell limit order: this is a sell order that only executes at or above the specified threshold.
3. Buy stop: this order tells the broker to buy when a certain price above the current market price has been reached. This type of order can be used to profit from upward trends in strategies like breakout trading. It can also be used to cover losses when short selling (which is the practice of selling borrowed stocks with the intention of buying them back later at a lower price).
4. Sell stop: a sell stop order instructs the broker to sell at or below a given price that is below the current price. This order is usually used to limit losses.

The duration of these orders varies. If the right conditions are met due to market movements, they will be triggered and converted into market orders to buy or sell the security as quickly as possible. If the market does not reach or cross the thresholds, you can specify that they are good ‘til cancelled or set a specific time limit after which they will no longer be valid.

The chart below outlines the strengths and weaknesses of the market and limit orders to help you decide which is best in different circumstances. A general rule of thumb is that market orders are best in highly-liquid markets, while limit orders are better suited for thinly traded or illiquid environments.