Should You Use Market or Limit Orders?

Market and limit orders each have a purpose, but using the wrong one at the wrong time can create unnecessary problems. The key is understanding whether the priority is getting filled or controlling the price.

A market order tells the market, “Fill me.” It is designed to get you into or out of the position immediately, at the best available price. The benefit is that the fill is essentially guaranteed. The drawback is that you do not know the exact price ahead of time, especially in a fast-moving or thinly traded stock.

A limit order says, “Fill me, but only at this price or better.” In other words, you are giving the order a price restriction. You are willing to buy or sell, but only within the limit you set.

Many traders get confused when the word “stop” is added. A simple way to think about it is: “computer, you do it.”

A stop market order means you want the computer to send a market order, but only after price reaches a certain level. That can be used to enter a position, or it can be used as a protective stop-loss after you are already in a position.

A stop limit order is similar, but with a price restriction. It says to send the order only after price reaches a certain level, but not to fill the order outside the limit price.

Here is a key point that surprises many traders. If you want the fastest possible fill, the answer is usually a limit order, as long as the limit is wide enough.

That may sound backwards at first, because many traders assume that “market order” automatically means fastest. But if the limit order is immediately executable and wide enough to reach the available prices, it can be routed and filled extremely quickly while still protecting you from being filled beyond your limit. It typically beats a market order. 

A limit order can control the price, but it can also cost you in another way. If your limit is too tight and you miss a trade by one penny, you may miss the entire profit from what could have been the best trade of the week.

That is why this cannot be looked at mechanically. You do not want to be penny wise and pound foolish. There is some art to it.

The bottom line is that market orders and limit orders are tools. A market order prioritizes getting filled. A limit order prioritizes controlling the price. The better choice depends on the stock, the spread, the liquidity, the speed of the move, and what you are trying to accomplish.

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