Slippage is the difference between the expected price and the actual price at which the trade is executed.

When should I use a market order?

Use a market order when immediate execution is more important than getting a specific price.

Can a market order fail to execute?

A market order guarantees execution in most cases, but in rare cases, execution may fail if there's no liquidity.

Which order type is suggested for beginners?

Beginners can use market orders to trade in highly liquid securities in small quantities.

Can I cancel a limit order after placing it?

You can cancel a limit order if it has not already been executed.

Market Order And Limit Order: What’s the Difference?

Do you prefer to buy something at the first price quoted by the seller or try to negotiate and buy at the price you’re comfortable with? The first transaction is a type of market order, and the second transaction is a type of limit order. Financial markets are dynamic, and selecting the correct order type can have a significant impact on your strategy.

Market orders and limit orders are among the most utilized orders in the stock market, each with its own applications. This blog explains two order types in simple terms, the pros and cons of using each order type and factors to consider when deciding between them.

Table of Contents

What is a Market Order?

A market order is a type of order to buy or sell a security immediately at the best available current price.
It is a common and simple order type used for transactions where speed of execution is more important than price.
A market order guarantees order execution but carries the risk of fulfilling the order at a less favourable price. This is true, especially for volatile securities. This order needs no input from the user concerning price, thus making it a popular order type among intraday traders.
The market order works best for stocks, ETFs, and assets that have high trading volumes.

How Does a Market Order Work?

A market order tells your broker to execute a trade right away at the best price currently available. Below is an overview of how the process usually goes:

Place An Order: Suppose you decide to buy 100 shares of XYZ stock using a market order.

Broker Sends the Order to the Exchange: Once you place the order using the mobile application or web terminal, the broker sends it to the stock exchange (NSE, BSE) for execution.

Order is Executed at the Best Available Price: The buy order is matched with the best ask posted by sellers. For example, if you want to buy 100 shares, your order will be filled at the lowest ask price the sellers are willing to accept.

Confirmation & Settlement: Once the trade is executed, you will receive a confirmation that outlines the number of shares transacted and the prices at which the transactions were executed. The settlement takes place according to the market regulations.

What is a Limit Order?

A limit order is a type of order in financial markets to buy or sell a security at a specific price. It allows better control over the execution price than a market order, but there is no guarantee that the trade will be executed.
A limit order executes only when the market price meets the price specified in the order or if the market price is more favorable than the limit order price. For example, a buy limit order executes the buy transaction at the limit price or a lower. If the market price is greater than the limit price, the order stays open and unfilled.
This order guarantees that you don’t pay more or accept less than your desired amount when making a purchase or selling securities.

How Does a Limit Order Work?

A limit order lets you set the highest price you will pay for buying or the lowest price you will accept for selling a specific security. Here is a detailed step-by-step explanation of how the process functions.

1. Place an Order: Mention the asset, quantity, and price at which you are willing to buy or sell. For example, place a buy limit order for 400 shares of XYZ company for INR 50.

2. The Broker sends the order to the Exchange: Once placed, the order goes to the stock exchange and is added to the order book. Buy limit orders in the order book are listed from highest to lowest price while sell limit orders are listed from lowest to highest price.

3. Execution: For buy limit orders, the order is executed only when the market price meets or falls below the specified price limit. The sell limit order executes only if the market price reaches or exceeds the limit price mentioned in the order.

Additionally, if the price condition is met, orders are filled based on time priority, i.e., they are handled on a first-come, first-served basis at the same price level. If there is no supply or demand at your limit price, your orders may go unfilled or partially filled. If the market does not hit your limit price, the order remains open.

Key Differences Between Market and Limit Orders

S.no	Basis	Market Order	Limit Order
1.	Execution	Executed instantly at the best available price	Executed only at the specified price or better.
2.	Price Guarantee	No price guarantee; the trade is executed at the current market price.	The price is decided, but the execution is not.
3.	Control over Price	No control over the execution price i.e., traders cannot decide the price level.	Complete control over the execution price i.e., the trader decides the price at which he wants to buy or sell.
4.	Best For	Quick entry and exits	Targeting specific entry or exit prices for trades.
5.	Example	Buy 100 shares at the current market price.	Buy 100 shares at INR 50
6.	Use in Volatile Markets	Orders may be executed at an unfavourable price	Helps avoid unfavourable prices because of price control.

Read Also: Stock Market vs Commodity Market

Factors to Consider When Choosing an Order Type

When choosing between a market order and a limit order, consider your trading goals, risk tolerance, and the current market conditions.

Importance of timely execution: Select market order if you need instant execution to seize time-sensitive opportunities.
Control Over Price: Limit orders are ideal for situations where precise pricing is essential, and you are unwilling to buy or sell beyond certain limits.
Market Volatility: Market orders can be a risky choice to execute orders during volatility because of unexpected price changes, whereas limit orders provide protection during volatility by ensuring the trade only executes at your target price.
Size of the Trade: Market orders are ideal for small trades as they are less likely to influence the market price. Limit orders are best suited for large trades as they help prevent excessive slippage and price changes.
Risk Tolerance: A market order is suitable for investors who value fast execution over lowering costs or targeting specific prices. Limit orders are ideal for those looking to avoid overpaying when buying or selling for too little.

Pros and Cons of Market and Limit Orders

Pros or Market Orders

Immediate execution and is ideal for time-sensitive trades.
Quick and easy to place as there is no need to enter the price.
Guaranteed order execution.

Cons of Market Orders

No assurance of execution at the expected price.
Using market orders in volatile markets can result in huge losses.

Pros of Limit Orders

Ensures the trade only executes at your specified price.
Protects against buying or selling at unfavourable prices.
Useful for determining precise entry and exit points.

Cons for Limit Orders

It may not execute if the market price doesn’t match or isn’t better than the desired price.
Execution may take longer or not happen at all.
Needs an understanding of price levels and market conditions for new traders.

Conclusion

Selecting the appropriate order type is important to effectively trade or invest in the financial markets. Market orders are ideal when quick and certain execution is essential. On the other hand, limit orders offer better control, making them ideal for traders and investors who are focusing on pre-defined entry and exit points. Understanding the key differences, benefits, and drawbacks of market and limit orders can help you determine which type of order better aligns with your trading strategy and risk tolerance. Stay informed and choose the right order type that maximizes your profit potential.

Frequently Asked Questions (FAQs)

What is slippage?
Slippage is the difference between the expected price and the actual price at which the trade is executed.
When should I use a market order?
Use a market order when immediate execution is more important than getting a specific price.
Can a market order fail to execute?
A market order guarantees execution in most cases, but in rare cases, execution may fail if there’s no liquidity.
Which order type is suggested for beginners?
Beginners can use market orders to trade in highly liquid securities in small quantities.
Can I cancel a limit order after placing it?
You can cancel a limit order if it has not already been executed.