Market orders and limit orders
A market order trades right away at the best available price. A limit order sets the price you will accept. Here is how each works.
When you buy or sell a stock or ETF, you place an order with your broker. The two most common types are market orders and limit orders. The difference is whether you control the price or the timing.
A few terms first
- Bid. The highest price a buyer is currently offering.
- Ask. The lowest price a seller is currently willing to accept. It is also called the offer.
- Spread. The gap between the bid and the ask.
- Fill. When your order is completed, it is "filled".
Market orders
A market order tells your broker to buy or sell right away at the best price available.
- When you buy, you usually pay around the ask.
- When you sell, you usually get around the bid.
The upside: a market order on a widely traded stock during regular hours is almost always filled within seconds.
The downside: you do not control the exact price. The price you see on your screen may change by the time your order reaches the market.
The difference between the price you expected and the price you got is called slippage. It is usually small for large, busy stocks. It can be much larger when:
- The stock trades in small volumes
- Prices are moving fast, such as right after news
- The market has just opened
- You are trading a large number of shares
Limit orders
A limit order sets the price you are willing to accept.
- A buy limit sets the highest price you will pay. The order fills only at that price or lower.
- A sell limit sets the lowest price you will accept. The order fills only at that price or higher.
The upside: you will not pay more, or receive less, than your chosen price.
The downside: your order may not fill. If the price never reaches your limit, nothing happens. Your order may also fill only in part, if there are not enough shares available at your price.
A simple example
A stock's ask is $20.05 and its bid is $20.00.
- A market order to buy would likely fill at about $20.05.
- A limit order to buy at $19.90 would wait. It fills only if a seller agrees to $19.90 or less.
- A limit order to buy at $20.10 would likely fill right away at $20.05 or close to it, because it is above the ask. The limit is a ceiling, not the price you must pay.
How long an order lasts
Orders come with a time setting.
- Day order. The order expires at the end of the trading day if it has not filled.
- Good 'til cancelled (GTC). The order stays open until it fills or you cancel it. Many brokers put a maximum time limit on these.
Stop orders
Some investors also use stop orders. A stop order becomes active only when the price reaches a level you set, called the stop price.
- A stop-loss order is often used to sell if the price falls to a certain level. Once triggered, it becomes a market order. In a fast drop, it may fill well below the stop price.
- A stop-limit order becomes a limit order once triggered. It controls the price but may not fill at all if the price moves past your limit.
Stop orders can behave in ways people do not expect during sharp moves or when a stock opens far from the previous close. See what volatility means.
Extended hours
Many brokers accept only limit orders before the open and after the close. Trading is thinner then, and prices can jump. See pre-market and after-hours trading.
Choosing between them
Neither order type is always better. Each one trades off certainty of price against certainty of filling.
- A market order puts timing first.
- A limit order puts price first.
Many investors pay attention to the type of stock they are trading. With large, heavily traded stocks, the spread is usually small. With small or thinly traded stocks, such as many on the TSX Venture Exchange, the spread can be wide, and a market order can fill at a noticeably different price.
The same in the US and Canada
Market and limit orders work the same way on US and Canadian exchanges. Brokers may offer slightly different order types and time settings, so check your own broker's order screen.
The short version
- A market order fills right away at the best available price.
- A limit order sets the highest price you will pay or the lowest you will accept.
- Market orders favour speed; limit orders favour price.
- Limit orders may not fill, or may fill only in part.
- Stop orders trigger only when a price you choose is reached.
This is general information, not investment advice.
Updated