While buying or selling a security, you would have noticed that there are options for placing two different kinds of orders: Market Order and Limit Order.
In this post we will attempt to understand the basic differences between the two.
1. Market Order:
Market order is one where you instruct your broker to buy or sell a particular security at the prevailing market price. While placing a Market Order one is required to input only the quantity to be bought or sold and not the price. This is because the order will be executed at the prevailing market price. For any liquid counter, placing a market order will almost guarantee execution.
Traders use a market order when they immediately want to enter into or exit a trade.
2. Limit Order:
While placing a Limit order, one needs to input not only the quantity but also the “price limit” at which the trade is to executed. So for a Buy Limit Order, you instruct your broker to buy at the “specified price” or lower. Similarly, for Sell Limit Order, you instruct your broker to sell at the “specified price” or higher.
Note that placing a limit order does not guarantee execution. This is because for the order to be executed the prevailing market price must ‘reach’ the specified ‘limit’ price.
Limit orders help traders place pre-determined entry or exit targets on their trades.