Since the prices of stocks are constantly fluctuating, many traders will try and be as strategic as possible when buying and selling their stocks. One of the main ways that they do this is by using different types of orders. In total, there are three different types of orders that traders can use: market orders, limit orders, and stop-loss orders. For now, we are only going to look at two of these.
This article will examine whether to use a market or a limit order when buying stocks.
What’s a market order?
A market order is defined as an order to buy or sell a stock at the best available price. When you initiate a market order, you are essentially telling your broker that you want to buy the stock as soon as possible at whatever the current price is.
A market order is the investing equivalent of putting in a cash offer to buy a house. Instead of spending weeks negotiating, you want to get the deal done right now and are happy to pay their price.
Keep in mind that market orders will only be executed when the stock market is open from 9:30am-4pm during the week.
Want to learn about finance but don’t know where to start?
What’s a limit order?
A limit order is defined as an order to buy a stock at a maximum price or sell a stock at a minimum price. If you are buying a stock then you will set a price ceiling for the maximum that you are willing to pay for it. If you are selling a stock then you will set a price floor for the minimum that you are willing to sell it for.
If a market order is similar to making a cash offer for a home then a limit order is like offering the seller 80% of the house’s listing price. You still want to buy the house but not for the current price and you are comfortable waiting a little bit.
Keep in mind that when you set a limit order there is no guarantee that your order will execute. For example, let’s say that you want to buy a stock that currently costs $50. However, you don’t want to pay $50, so you set a limit buy order for $40. The price drops to $45 before rising over the following year to $100. Your limit order will have never been executed because the price never dropped all the way to $40.
Which is best for you?
Just like there is no “right” car that you should drive, there is not really a “best” order to use. The right order is going to depend a lot on your investing strategy. However, here are the best times to use both orders:
- Market order – If you want your order to execute as soon as possible and are fine paying the stock’s current price then a market order will work best.
- Limit order – If you are only interested in buying or selling a stock for a specific price then a limit order will work best.
We hope that you’ve found this article valuable when it comes to learning whether you should buy stocks market or limit order. If you’re interested in reading more please subscribe below to get alerted of new articles as we write them!