Should you use Market Orders or Limit Orders when buying a stock?

As a newbie investor, it can be tough getting your head around different concepts. One thing I wasn’t too sure about when I started buying stocks online was whether to use a Market Order or a Limit Order. In the simplest of terms:

  • Market Order – is a buy or sell order to be executed immediately at current market prices
  • Limit Order – is an order placed with a brokerage to buy or sell a set number of shares at a specified price or better

Whilst there has been much written about market and limit orders, there is not much written about the application of them in the real world. Thus it can be hard to chose which one of the two orders to execute your trade with.

In the real world, it is far better to use limit orders than market orders, especially when the markets are volatile. Here is why..

When you place a market order, you essentially buy a stock immediately at any price. Using one is like telling your broker, “Buy me this stock for whatever price you can get.”

When using a limit order, you essentially set a maximum price you are willing to pay, and it will sit unfilled until your broker can get that price or less (or until you cancel the order). It’s like telling your broker, “Buy me this stock, but only if you can get it for less than £20” (or whatever price you specify).

If a stock price is moving higher, you can easily pay too much for a stock using a market order because you’ve given up control of the price you pay. Your broker has free reign and we all already know that financial institutions don’t have our best interests at heart.

Don’t use market orders – use limit orders instead. Set your price at the same price you see in the market, and then wait. You never want to be the person that pays the worst price of the day. For the average investor, limit orders are better to use then market orders.