Market Orders vs. Limit Orders

After the recent surge in low cost online stockbrokers many people have jumped into the game known as Wall Street. Unfortunately many of these new investors have little or no knowledge of how to play the game let alone how to win. I will try to help the new investor out by giving them an explanation of what market and limit orders are and when they should be used.

Market Order
A market order is a buy or sell order in which the broker is to execute the order at the best price currently available. So here is how it works say you want to buy ten shares of company XYZ. You put in a market order for ten shares and hit the execute button. The stock order will automatically be matched up with the current market price and executed. The bad thing about a market order is that you could end up paying a lot more for a stock than you intended on doing. If you put in a market order for a stock and suddenly the price jumps ten dollars higher a share then you have to be able to cover the increase in the stock price. Market orders can be used in both the buying and selling of stock. People interested in trading volatile stocks should shy away from using market orders due to the fact that they could end up paying a much higher price for a stock than they expected to.

Limit Order
A limit order is an order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price). If you want to buy ten shares of XYZ at ten dollars a share then your order will be automatically executed when the share price hits ten dollars a share. Limit orders can be used in both the buying and selling of stock. For the average investor I feel that limit orders are the best. In fact when I use trade with my online account I only use limit orders. With the limit order you are certain of the price at which your stock will be bought or sold so there are no surprises. Another great aspect of the limit order is the fact that your orders can be placed and executed while you are busy at work or enjoying a game of golf. On the downside it may take a long time for the stock price to get to the same place as your limit order.

I think the limit order is the best bet for most investors. You will always know how much you are putting in and how much you are getting out of a stock. Some online brokers charge the same price for all orders placed while others charge more for a limit order than for a market order. Most people will feel better spending a few extra dollars to place a limit order than risking hundreds or even thousands of dollars in a possible fluctuation in a stocks price when using a market order.