For long-term investors, the type of stock order you choose is more than a mere transaction. It forms part of a fundamental strategy that can shape your portfolio's growth. Two types of stock orders you may have heard about are market orders and limit orders. A market order seizes an immediate opportunity, regardless of the fluctuating cost. In contrast, a limit order allows you to set a specific price target, waiting for the perfect moment to strike.

This article breaks down the differences between market orders and limit orders. It’s a guide through their impacts and how they can shape your investment journey. Understanding these foundational tools is helpful in developing a strategy that weathers market fluctuations and nurtures growth over time. This applies whether you're looking to optimise your entry points or safeguard your gains.

In this article, we look at how you can do that with a market order or limit order.

What is a stock order?

A stock order is simply an instruction to buy or sell shares . The type of order can affect the price you pay or receive, the timing of the transaction, and the likelihood completing the transaction.

Understanding the differences between order types can help you navigate the market effectively as a long-term investor. Knowing when and how to use different types of orders can be as crucial as choosing which stocks to invest in. This foundational knowledge helps in building a strategy that aligns with your financial goals and market conditions.

What is a market order?

A market order is a type of stock trading instruction that executes as quickly as possible at the current market price. It's like saying: "I want to buy or sell now, no matter the price." Market orders are filled almost instantly during trading hours. They tend to work well for shares that have a lot of buyers and sellers, ensuring the order can be completed swiftly.

Advantages and disadvantages

To help you decide whether a market order is suitable for your circumstances, here are the pros and cons of this order type.

Advantages of a market order

• Speed: Market orders are executed quickly, making them useful for investors who want to enter or exit a position without delay.
• Execution certainty: They almost guarantee that the order will be executed, as long as there are buyers and sellers in the market.

Disadvantages of a market order

• Lack of price control: The main drawback is the inability to control the price at which the order is executed. This can lead to buying at a higher price or selling at a lower price than intended, especially in volatile markets .
• Potential for price slippage: In fast-moving markets, the final execution price may differ significantly from the price seen when placing the order.

Market order example

Weili decides to purchase shares of a well-known technology company following a positive earnings report. She uses a market order to immediately capitalise on the momentum, aiming to secure the stock before any major price increases. Weili's order is executed within seconds at the current market price, slightly higher than the price at the time she decided to buy.

Outcome: Weili acquires the shares instantly, benefiting from the stock's continued rise throughout the day.

Considerations: While she pays more than the lowest price of the day, her priority is securing the stock quickly. That means accepting the risk of a higher cost for the benefit of immediate ownership.

This fictional example illustrates the trade-off between speed and price control in using market orders. Investors like Weili who prioritise quick entry or exit might find market orders suitable. Meanwhile, investors who seek more control over the transaction price might consider other options.

What is a limit order?

A limit order specifies the maximum or minimum price at which you’re willing to buy or sell shares. Unlike a market order, a limit order gives you control over the price, but doesn’t guarantee execution. The trade only occurs if the stock reaches the specified price.

An example of a type of limit order is a stop-loss order . A stop-loss order is designed to limit an investor's loss on a security position. It works by setting a stop-loss price level. If it’s reached, it automatically converts the limit order into a market order. Once the stock hits the specified stop-loss price, the order to sell (or buy) is executed at the next available market price. Because it turns into a market order, there's no guarantee the sale price will match the stop price if the market is particularly volatile.

Advantages and disadvantages

Before deciding whether a limit order is for you, it's worth weighing up the pros and cons of this order type.

Advantages of a limit order

• Price certainty: You have the assurance that the transaction will only occur at your specified price or better.
• Budget control: This type of order helps manage spending, as you can set a price that aligns with your strategy.

Disadvantages of a limit order

• No execution guarantee: If the market price never reaches your set limit, the order won’t be executed.
• Missed opportunities: In a rapidly rising market, setting a limit order too low may mean missing out on a profitable purchase.

Limit order example

Tom identifies an opportunity in a renewable energy company. He decides to place a limit order to buy shares at a price lower than the current market value. He’s hoping to capitalise on any short-term dips. After several days of market fluctuations, the stock briefly dips to Tom's target price.

Outcome: Tom's limit order is executed, allowing him to purchase the shares at his desired price. Later, as the market rebounds, the value of his investment increases, reflecting a well-timed entry.

Considerations: While Tom achieves a lower purchase price, he risks missing the opportunity altogether if the stock doesn’t drop to his limit. His strategy hinges on the market's volatility and his patience, showcasing the potential rewards and risks of using limit orders.

This fictional example highlights how limit orders can serve as a strategic tool for investors who prefer to set specific entry points in volatile markets. This method also requires patience and acceptance of the possibility that the order may never be filled. Considering these dynamics is essential for making informed investment decisions that match your long-term financial goals.

Differences between market order and limit order

When choosing between a market order and a limit order, understanding their differences is key to aligning your strategy with your investment objectives. Here's how they differ:

Feature	Market order	Limit order
Execution	Executes immediately during market hours.	Executes only if the stock reaches the specified price.
Price control	None - trades at the current market price.	High - allows setting a maximum purchase or minimum sale price.
Predictability	Low - price at execution may vary from the seen price at order time.	High - the order only fills at the set price or better.
Risk of non-execution	Very low - generally executes unless there's a major market disruption.	Higher - depends on the market price reaching the limit set.
Effective use	In highly liquid markets where execution speed is priority.	In less liquid or more volatile markets to control costs.
Suitability	Investors needing quick execution without concern for price fluctuations.	Investors with specific price goals who can afford to wait.

Market orders or limit orders – which one should I choose?

There’s no “should” in investing; it’s about deciding what’s right for you. Choosing between market orders and limit orders depends on your investment strategy and specific circumstances. Here’s how each order type fits into different strategic approaches:

Market orders

• High liquidity scenarios: Potentially useful for heavily traded stocks and ETFs with consistent price patterns. Investors use market orders when they need certainty of execution to quickly enter or exit the market.
• Responding to news: When financial news breaks that could impact stock prices significantly, using a market order can allow investors to act swiftly before prices adjust dramatically.
• Simplifying trades: For those who prefer straightforward transactions without the need to monitor stock price fluctuations closely.

Limit orders

• Targeting price entry/exit: Investors with specific price targets in mind use limit orders to control the cost of their transactions. This strategy is often used when buying dips in price or selling at resistance levels.
• Managing volatile stocks: In markets where stock prices fluctuate widely, limit orders can help manage the risk of buying too high or selling too low.
• Budget control: Limit orders ensure that a buy or sell transaction doesn’t exceed the predetermined price, helping to keep financial plans on track.

Both market orders and limit orders offer unique advantages that can be tailored to suit various investing strategies. An investor prioritising immediate execution might prefer a market order. Alternatively, an investor seeking price precision might go for a limit order. Understanding the optimal context for each can help you make informed decisions that align with your long-term investment strategy.

The wrap-up on market and limit orders

Understanding the difference between market and limit orders can provide a solid foundation to confidently navigate the stock market’s complexities . Each order type offers unique benefits and has its considerations, allowing you to tailor your strategy to match your financial goals and risk tolerance.

While market orders offer quick execution, limit orders give you price control and may help manage potential losses. Choosing the right order type depends on your specific situation, such as market conditions, stock liquidity, and your investment horizon.

Remember, no single strategy fits all. Keep educating yourself and consider consulting with a professional financial adviser to refine your approach. Stay informed and thoughtful in your decisions by doing your research. Making it to the end of this article is a great start!