In short: Limit orders market: the two most common order types, how they differ and when each makes sense.
When you buy or sell, you tell your broker how to do it. The two basic order types are market and limit.
Market order
A market order buys or sells right away at the best available price. It almost always fills, but you do not control the exact price. In a fast or thinly traded stock, you can pay much more or receive much less than you expected.
Limit order
A limit order sets the maximum you will pay when buying or the minimum you will accept when selling. You control the price, but the order may not fill if the market never reaches it.
Which to use
For large, heavily traded stocks, market orders are usually fine for small amounts. For small, volatile or thinly traded stocks, limit orders protect you from nasty surprises.
Other tips
- Check the bid and ask before you order.
- Be careful trading in the first minutes after the open, when prices jump.
- Understand how long an order stays active, such as day only or until cancelled.
The habit
When in doubt, use a limit order.
Market orders
A market order buys or sells right away at the best available price. It is fast, but you do not control the price. In a calm, heavily traded stock, the price is usually close to what you see. In a thinly traded stock, a market order can fill far from the quoted price.
Limit orders
A limit order sets the price. A buy limit at $10 will only fill at $10 or lower. A sell limit at $12 will only fill at $12 or higher. You control the price, but the order may not fill if the market does not reach it.
An example
A stock has a bid of $4.90 and an ask of $5.10. A market buy could fill near $5.10 or worse. A buy limit at $5.00 may fill if sellers come down to your price, and protects you from paying more.
When to use which
For small or fast-moving stocks, limit orders protect you. Check the spread and volume. See also stop loss orders.
Frequently asked questions
Can a limit order fail to fill?
Yes, if the price never reaches your limit.
How long does an order stay open?
It depends on the time setting, such as day or good until canceled.
Further reading: Investor.gov from the U.S. SEC and the Canadian Securities Administrators investor education site offer free, independent guides for new investors.
Reading the bid, ask, and spread
Every stock has two live prices. The bid is the highest price a buyer is offering. The ask is the lowest price a seller will accept. The gap between them is the spread. When you place a market buy order, you usually pay the ask. When you place a market sell order, you usually receive the bid. The spread is a small cost you pay for speed.
For a large, heavily traded stock, the spread can be a penny or two. Say the bid is $24.98 and the ask is $25.02. On 100 shares, the most the spread could cost you is about $4. That is small. Now take a thinly traded stock with a bid of $1.80 and an ask of $2.00. The spread is 20 cents, or 10% of the price. On 500 shares, a market buy that fills at the ask followed by an instant market sell at the bid would lose about $100 before the stock moved at all.
A worked limit order
Say you want 200 shares of a stock now showing a bid of $8.40 and an ask of $8.50. You decide you do not want to pay more than $8.45. You enter a buy limit order at $8.45. Three things can happen. The ask might drop to $8.45 or lower, and your order fills. The price might stay near $8.50, and your order waits. Or the price might rise, and the order never fills.
That last result is not a failure. It is the order doing exactly what you asked. The trade-off is simple. A limit order protects the price but not the fill. A market order protects the fill but not the price. Knowing which of the two matters more for a given trade is most of the skill.
Orders that sit in the book
A limit order that does not fill right away goes onto the order book. Others can see it, and it can fill later. A day order expires when the trading session ends. A good-until-canceled order stays open longer, though brokers set a maximum, often around 60 to 90 days. Check your broker’s rules. Many people forget an open order, and it fills weeks later when they no longer want the trade. If you use longer orders, look at your open orders list from time to time.
Partial fills and fast markets
Sometimes only part of your order fills. If you ask for 500 shares at a limit price and only 200 are available at that price, you may get 200 now and the rest later, or never. This happens more in small stocks. It is normal, but it can leave you with a smaller position than you planned.
In the first minutes after the open, or right after big news, prices can move quickly and spreads can widen. A market order placed then can fill at a surprising price. A limit order puts a floor or ceiling under your trade. That is one reason many careful investors lean on limits in those moments.
Common mistakes
- Placing a market order on a thin stock without checking the spread first.
- Setting a limit so far from the market that it never fills, then chasing the price with a market order.
- Forgetting to cancel an old good-until-canceled order.
- Assuming an order filled without checking your account.
What to do next
Open your broker’s trade screen without placing anything and look at the bid, ask, and daily volume for three stocks of different sizes. Compare each spread as a percent of the price. It takes five minutes and shows you why order type matters. Once you know what you paid, you can track it with the average cost basis calculator, and see the result of a finished trade in the stock profit loss calculator. For common terms like bid and ask, the glossary has short definitions.
Education only, not investment advice.
