On a similar note...
On a similar note...
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When you’re ready to buy or sell a stock or fund, you have two main ways to determine the price you’ll trade at: the market order and the limit order. With market orders, you trade the stock for whatever the going price is. With limit orders, you can name a price, and if the stock hits it the trade is usually executed.
That’s the most fundamental difference between a market order and a limit order, but each type can be more appropriate for a given trading situation. Here’s what you need to consider.
Market orders: Make the trade now
The biggest advantage of a market order is that your broker can execute it quickly, because you’re telling the broker to take the best price available at that moment. If you’re buying a stock, a market order will execute at whatever price the seller is asking. If you’re selling, a market order will execute at whatever the buyer is bidding.
The biggest drawback of the market order is that you can’t specify the price of the trade. Many times that doesn’t matter, however. For large companies that are highly liquid (trade in high volumes), the difference between buyers’ bid price and sellers’ ask price — called the bid-ask spread — is usually just a penny or two. Unless you’re buying huge numbers of shares, that difference doesn’t matter.
You can’t specify the price of the trade. Many times that doesn’t matter, however.”
However, if the price moves quickly, you could end up trading at a vastly different price from when you entered the order. That’s rare but possible. A more likely scenario: You enter a market order after the stock market closes and then the company announces news that affects its stock price. If you don’t cancel the order before the exchange opens the next day, you may end up trading at a much different price than you had intended.
Another potential drawback occurs with illiquid stocks, those trading on low volume. When you enter a market order, you might spike or sink the stock price because there are not enough buyers or sellers at that moment to cover the order. You’ll end up with a much different price than just moments before as your order influences the market.
Go with a market order when:
You want a quick execution at any cost
You’re trading a highly liquid stock with a narrow bid-ask spread (typically a penny)
You’re trading only a few shares (for example, less than 100)
>>Ready to start trading? Here are some picks for our best online brokers for stock trading:
Limit orders: Make trade when the price is right
The biggest advantage of the limit order is that you get to name your price, and if the stock reaches that price, the order will probably be filled. Sometimes the broker will even fill your order at a better price. Typically, you can set limit orders to execute up to three months after you enter them, meaning you don’t have to watch compulsively to get your price.
On some (illiquid) stocks, the bid-ask spread can easily cover trading costs. For example, if the spread is 10 cents and you’re buying 100 shares, a limit order at the lower bid price would save you $10, enough to cover the commission at many top brokers.
The biggest drawback: You’re not guaranteed to trade the stock. If the stock never reaches the limit price, the trade won’t execute. Even if the stock hits your limit, there may not be enough demand or supply to fill the order. That’s more likely for small, illiquid stocks.
If the stock never reaches the limit price, the trade won’t execute. Even if it does, there may not be enough demand or supply.”
Another drawback, especially with an order that can execute up to three months in the future, is that the stock may move dramatically. Your trade may be filled at a price much different from what you could have otherwise gotten.
Imagine Apple announces a potentially huge new product and its stock spikes from $190 to $210, while you have a limit order to sell at $192. Unless you’re watching the news closely, you might end up selling for $192 when you could have received more. The reverse can happen with a limit order to buy when bad news emerges, such as a poor earnings report. You may end up buying at a much higher price than you otherwise could have or now think the stock’s worth.
Go with a limit order when:
You want to specify your price, sometimes much different from where the stock is
You want to trade a stock that's illiquid or the bid-ask spread is large (usually more than 5 cents)
You’re trading a high number of shares (for example, more than 100)
A savvy way to save money
Limit orders can help you save money on commissions, especially on illiquid stocks that bounce around the bid and ask prices. But you’ll also save money by taking a buy-and-hold mentality to your investments. Because you avoid selling out of the market, you’ll incur fewer commissions and you’ll avoid capital-gains taxes, which could easily dwarf trading costs. Plus, you’ll want to stay invested to let compound growth work its magic.