What you will learn
- Explain how a market order works and why it can slip to a worse price
- Explain how a limit order works and why it might never fill
- Pick an order type that fits the situation
- Describe how traders use a stop order to limit a loss
Once you decide to trade, you still have to choose how to place the order. The two basic choices are market and limit. A market order gives you a better chance of trading right away. A limit order gives you control over the price. In most cases, you cannot be certain of both the price and the fill.
Market order vs limit order
The Finance and Quant Society explains all three order types. Start here, then compare each order with the examples below.
Market orders: trade now
A market order asks to trade immediately at the best price available. It almost always fills right away because it takes an order already waiting in the book. You give up some control over the final price, though. In a fast market or a stock with little trading, your fill can be worse than the price you saw a moment earlier. That gap between the expected price and the actual fill is slippage. Since the market order uses an existing order, it removes liquidity from the book.
Limit orders: set your price
A limit order trades only at your chosen price or better. A buy limit never pays more than the limit you set, while a sell limit never takes less. You control the price, but the trade may not happen. If the market never reaches your limit, the order stays unfilled. While it waits in the book, other traders can trade against it, so the limit order adds liquidity.
Key terms
- Market order
- An order to trade right away at the best available price. The fill matters more than the exact price.
- Limit order
- An order that trades only at a price you choose or a better one. Price control matters more than getting filled.
- Slippage
- The difference between the price you expected and the price you received. It often happens with market orders.
- Stop order
- An order that does nothing until the price reaches a trigger. Traders often use one to cap a loss.
| Order | What you control | Main risk | When it fits |
|---|---|---|---|
| Market order | A quick fill | An uncertain price (slippage) | You need to trade now and the stock is liquid |
| Limit order | The price paid or received | No fill at all | The price matters more than speed |
You need to sell now
You own shares in a large, liquid company. Bad news arrives, and you want to sell immediately even if the price is not perfect. Which order fits?
Use a market order when an immediate fill matters most and the stock is liquid.You will only buy at $47
A stock trades at $50. You want it only if the price falls to $47, and you are fine with never buying if that does not happen. Which order fits?
Place a buy limit at $47. It will trade only if the stock reaches your target or a lower price.Stop orders wait for a trigger
A stop order stays inactive until the price reaches a level you set, called the trigger. Traders often use stops to limit losses. Once triggered, a stop market order becomes a market order. It should fill quickly, but the final price is uncertain. A stop limit order becomes a limit order instead. That protects you from a terrible price, but a fast drop through your limit could leave the order unfilled. Later units return to stops in more detail. For now, remember that the trigger activates the order.
Order types: market vs limit on a real platform (Charles Schwab)
Watch these orders being placed on a real platform. Notice where you choose the order type and how slippage can appear.
Choose the order for each goal
Match each trading goal with the order that fits it.
Choose a market order when the fill matters most. Choose a limit order when the price matters most.
Where is slippage more likely?
Compare a very liquid stock with one that trades only lightly. Which one makes a market order more dangerous, and why? Answer in two or three sentences.
Write an answer before comparing it with the model response.
Model answer
A market order is riskier when trading the lightly traded stock. With few orders waiting in the book, one market order can move through several prices and fill much worse than expected. A liquid stock usually has plenty of shares available near the current price, so slippage tends to be small.
Order type decides how your trade meets the market. Next, you will put the pieces together by reading the fields in a stock quote.