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An order in a stock market can either be buying a stock or selling a stock. In technical terms, a buying or selling transaction that you make is known as a buy or sell order. There are two types of order that you can place when investors are transacting in the stock market: market order and limit order. So market order and limit order are basically two different ways of purchasing and selling shares in the stock market.

Meaning

Here’s the difference between a market order and limit order :

Market order is a buy or sell order in a stock market where investors only mention the quantity they want to buy or sell and the price is decided according to live market prices.

Limit order is when investors specify both the quantity and the price and the order is executed only when the market price reaches the desired level.

How Does a Market Order Work?

In a market order, the quantity at which the stock is bought and sold is specified and not the price. In a market order, transactions are placed at live market prices. Investors generally monitor the prices of the stock for weeks or months and wait for the price to reach the desired price.

After an order is placed for X shares, it goes to the exchange. The stock exchange matches the buy order with another investor’s sell order and the transaction takes place.

What Should You Know Before Placing a Market Order

In a market order, there is a slight risk for both investors: buyers and sellers.

There may be a second’s lag or more between when an order is placed and when it is executed. The price at which the order is actually executed may not be exactly the same as when the order is placed because stock market prices change within seconds.

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There are chances that a sell order is placed for 100 shares of a company when the price was Rs 200 but by the time it gets executed, it is possible that the price of a single share falls to Rs 198 or lower.

How Does a Limit Order Work?

In a limit order, you will have to specify the quantity you want to buy and sell and also your desired price. The order will not be executed at any other price. This is the main difference between market order and limit order.

Say you want to buy 10 shares of Reliance Industries at Rs 2,000 per share and the stock is trading at Rs 2,160 levels, the order will not be executed.

It is only when the price of a share falls to Rs 2,000 the order will be executed. Order will be placed with the exchange after the price and quantity is mentioned but will be executed only when RIL’s share value falls to the desired level.

What Should You Know Before Placing a Limit Order

Your limit order can be cancelled by the broker if it does not reach the desired value in a single trading session.

Limit orders don’t have a 100% success rate. If more investors placed an order for varying quantities at Rs 2,000, in that case, orders will be executed depending on which investor’s order reached the exchanges first. The orders will start getting executed in ascending order.

Now, since buying and selling orders are matched for a transaction to be successful naturally if there is no one selling shares, an investor won’t be able to buy any too. So if at a certain price there are multiple limit orders, the orders will start getting executed chronologically till there are enough shares available.

For example:

Desired limit price: Rs 100

Sellers:

Say Investor A has posted a sell order for 10 shares

Investor B 15 shares

Investor C: 3 shares

Buyers: 

Investor D posted a buy order for 25 shares

Investor E for 10 shares

Since D posted the order first and there are enough shares available for sale for him (A+B), his order will get executed. However, E’s order may not get executed because he/she wants to buy 10 shares but the order that is available has only 3 shares on offer. Also, E’s order was placed with the exchanges after D’s order.

Difference Between a Market Order and Limit Order

Market OrderLimit Order
Only quantity needs to be specified.Quantity and price both have to be specified while placing an order
Transaction takes place at live market pricesOrders are executed at price specified by the investor

Market Order vs Limit Order: Which One Should You Choose

Placing a market order is more suited when the aim is to buy or sell shares quickly, as buying and selling are governed by market conditions and not a pre-decided price. Market orders are also suited for individuals who are looking to invest for the long term and are not bothered by short term market fluctuations. On the other hand, limit orders might make sense when an investor wants to take advantage of a volatile market and hence are more suited to traders looking to book gains in the short term. Limit orders also need a bit more understanding and experience and are often used by seasoned investors. Regardless of what you choose, understanding of the inherent risks and workings of the stock market is important.

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