Limit Orders vs. Market Orders: Important Differences in How They Work

INVESTING - INVESTING BASICS
Limit orders and market orders are two tools you can use to trade stocks and other investments but it’s important to understand that they work in very different ways.
Updated April 3, 2023
Limit Orders vs. Market Orders

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People who are just starting in the stock market may get ready to make their first investment purchase — and then get stuck when they come across some terminology they don’t understand. For example, when buying individual investments, some investing platforms allow people to choose between placing a market order and a limit order. But what does that mean and which should you choose to achieve your financial goals?

While these two different order types aren’t confusing once you understand them, they’re not easy to decipher based on their names. Here’s what you need to know to decide which order type fits your situation better.

In this article

What is a limit order?

A limit order is a particular type of buy or sell order that triggers once a trade can successfully execute at a price you specify or better. A buy limit order gives you control over what price you purchase an investment at. A sell limit order provides control over what price you sell an asset at.

If the order isn’t able to execute immediately because of the parameters you chose, it may be delayed until the investment or stock reaches the price you specify or a better price. In some cases, the limit order may not execute or may not execute for the total number of shares requested if the limit price cannot be met.

Limit orders may expire at different times depending on your brokerage and the options you select. Some expire at the end of the day if the trade is not fulfilled. Others are good-’til-canceled (GTC) orders, which last longer but not indefinitely. Check with your brokerage to see how long your limit orders last.

You can use limit orders to purchase most of the same types of investments you could purchase with a regular buy order. This includes assets such as stocks, ETFs, cryptocurrency, and more. However, mutual funds do not use limit orders due to the way people buy and sell them.

How limit orders work

Limit orders exist to help you make buy and sell transactions at specified prices or better rather than whatever the available price is at the time of the order. This gives you more control over the pricing of your investment transactions. If the price is never met, the transaction never goes through.

These orders may be helpful if you want to buy or sell a stock at a target price. Sellers could use limit orders to lock in gains if a stock’s price increases. Buyers could use limit orders to purchase stock once it dips to an attractive level.

Limit orders may expire at different time frames depending on your broker and the specifications you set. Some limit orders are only good for the current day. Other limit orders may be able to last for weeks or months.

It’s also possible for a limit order to get partially filled if only some shares are available at the set price or better. For instance, a person may place a buy limit order that expires in 30 days for 100 shares at $10 per share. At the time of the order placement, the investment’s current price is $12 per share. This buy limit order will allow the investor to purchase if the stock drops to an acceptable entry point for the individual.

Two weeks later, the market price drops below $10 per share. The order will trigger once the asset reaches the $10 level and will fill as many shares as possible at the $10 price or lower. If the order cannot fulfill the entire 100 share order at $10 or lower, it will purchase as many shares as possible.

This can also work for sell orders. An investor may set a sell limit order for 20 shares at $35 when its current price is $30 per share. This limit could be a way for an investor to more easily sell shares and lock in their gains if the price increases. When the stock hits a price of $35 per share, the trade will execute, if possible.

However, you could also end up holding on to shares. If the limit order could fill eight shares at $35 per share but not the whole 20 share sell order, it will sell the eight shares. The investment price may not hit that $35 level again. If this happens, you’d be stuck holding on to the 12 remaining shares of stock.

How are limit orders and market orders different?

A market order allows you to buy or sell at whatever the best available market price is at the time when you place the order. A market order allows the full order to execute no matter how fast or how far the price moves after you place your order. While limit orders focus on control of the purchase price, market orders prioritize the execution of the entire order as the most critical factor.

Are limit orders a smart strategy for you?

Limit orders may be an essential tool depending on the type of investor you are. Traders focused on active trading may carefully consider when an investment is a good value based on the price compared to other factors such as earnings.

These traders may focus on specific strategies that only make sense when investments meet these metrics. A limit order allows these traders to buy or sell stocks when the particular metrics exist and won’t execute the order if the price falls outside of the range they’re comfortable with.

Long-term buy-and-hold investors may not be as sensitive to small swings in prices when placing an order. Instead, these traders may be more focused on adding to their position. Any initial differences in price will likely remain relatively small in the big scheme of long-term investing over decades. These investors may get better use out of market orders.

In fact, long-term buy-and-hold investors may prefer taking an even simpler approach by using a robo-advisor. Robo-advisors help people manage their portfolios on their behalf, typically after you answer a number of questions about your goals and risk tolerance, and they often help you take advantage of tax optimization opportunities as well.

Most major brokerage firms typically allow limit orders if you do want to use them. This often includes some of the best investment apps, such as Robinhood and Webull, as well as the best brokerage accounts, such as Vanguard and Fidelity.

Pros of limit orders

Limit orders have one significant benefit to consider:

  • More control over the price of purchases and sales: Investors can have their transactions fill at their desired price or better if trades can execute.

Cons of limit orders

Don’t forget about the downsides of limit orders before placing one:

  • Trades may not execute: Investors trying to eke out a slightly larger gain could find themselves missing out on buying or selling a stock if prices move quickly or never reach the target price.
  • Trades may only partially execute: You won’t get the entire quantity you wanted to purchase if only half of your order can transact at your limit order price.
  • Trades may take longer to execute: A transaction might take hours, days, or weeks to execute if it executes at all.

FAQs

What is the difference between a limit order and a stop-limit order?

A limit order allows you to buy or sell an investment at a given price or better. A stop-limit order takes this one step further. The order only triggers once the asset reaches a specific price point. Then, the system places a limit order based on your specifications.

For example, say you are looking to potentially sell a certain stock. You may set the sell stop order to trigger at a stop price of $10 per share and the limit sell order to execute at $9.50 per share or better. If you had just set the limit sell order to $10 and not all shares could sell at the $10 price, you could end up still holding shares. But by extending the limit sell order to $9.50, you give the order more room to execute the sale if you’re dealing with market volatility and the investment is rapidly dropping in price.

What happens if a limit order is not filled?

A limit order may not get fulfilled if the price does not hit the limit order price or better. In this case, one of three things may happen. The limit order may expire based on you or your brokerage’s specifications. Alternatively, the limit order may continue outstanding until it eventually fills. Finally, you may decide to cancel the limit order before it gets filled or expires on its own.

Should I use limit orders?

You may want to use limit orders if the price you pay for an investment is more important to you than owning the asset if it doesn’t reach the limit price. For example, short-term active traders may only want to buy an investment if it meets a particular metric. If it doesn’t hit that metric, it isn’t a good purchase for them. In this case, limit orders might make sense. Long-term investors might not care as much about small changes in the current market price.


Bottom line

Active traders learning how to invest money may use limit orders as an essential tool. These orders allow traders to control the prices they buy and sell their investments at and make what they believe to be smart money moves for a volatile market. When used correctly, they might help traders avoid transactions that don’t make sense based on their overall trading strategies.

Long-term buy-and-hold investors might not care as much about the execution prices on their orders. Even so, certain instances might make limit orders make sense for these investors. For example, trading large quantities of investments with low trading volume could cause the price to swing wildly.

If you’re not sure which types of orders are best for your goals, then you might want to seek investment advice from a professional.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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Author Details

Lance Cothern Lance Cothern, CPA is a personal finance writer and founder of MoneyManifesto.com. Lance's work covering several personal finance topics has been published in U.S. News & World Report, Business Insider, Credit Karma, Investopedia, and several other publications.

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