Introduction
Market orders and limit orders are the two most common ways you place a trade when you buy or sell a stock. In one sentence, a market order tells your broker to execute immediately at the best available price, while a limit order tells your broker to wait until a specific price or better is available.
Why does this matter to you? Because the order type you pick controls execution speed, the price you pay or receive, and the chance your trade will or will not fill. Which should you use when a stock is volatile or when you want a precise entry price?
In this article you'll learn how market and limit orders work, the mechanics behind execution, practical scenarios for beginners, and real-world examples using tickers like $AAPL and $TSLA. By the end you'll know which order to choose in common situations and how to avoid costly mistakes.
Key Takeaways
- Market orders execute immediately at the best available price, so they're fast but the final price can vary from the quote.
- Limit orders let you set the maximum price you will pay or the minimum price you will accept, so they control price but may not fill.
- Use market orders for highly liquid large-cap stocks when speed matters, and use limit orders to manage price risk or when markets are thin.
- Be aware of bid/ask spreads, slippage, partial fills, and time-in-force settings like day or GTC.
- Practice placing both order types in a paper trading account to build confidence before using real money.
How Market Orders Work
Execution basics
A market order instructs your broker to buy or sell immediately at the best available price. When you click buy with a market order, the order is matched with resting orders on the exchange book, usually crossing the current ask for buys or the bid for sells.
Because market orders accept the current market price, they prioritize speed over price certainty. For liquid, heavily traded stocks such as $AAPL or $MSFT the spread between bid and ask is often only a few cents, so market orders normally fill very close to the quoted price.
Risks: slippage and price impact
Two common issues with market orders are slippage and price impact. Slippage happens when the price you receive differs from the displayed quote because the market moved between your order placement and execution. Price impact means a large market order can move the market price if there are not enough opposite orders to absorb the size.
Slippage is usually small for high-volume stocks, but it can be large during earnings, news events, or for low-volume stocks. If you need immediate execution and are comfortable with paying the current market, a market order is appropriate.
How Limit Orders Work
Price control and execution rules
A limit order sets the maximum price you will pay when buying or the minimum price you will accept when selling. A buy limit order executes only at the limit price or lower. A sell limit order executes only at the limit price or higher. If those prices never occur, the order will not fill.
Limit orders give you price certainty, but they trade speed for control. You might miss a trade if the market moves past your limit without trading at that level, or if someone else fills the available shares first.
Partial fills and time-in-force choices
Limit orders can be partially filled if only some shares are available at your limit price. You can also choose time-in-force settings, for example a day order that expires at market close, or a good-till-canceled order that stays open until you cancel it or the broker enforces a maximum time.
Using limit orders is helpful when you want to manage the price you pay, such as trying to buy a dip or setting a target sell price. Remember that a very tight limit may never execute.
When to Use Each Order Type
Choosing between market and limit orders depends on your priorities: speed or price control. Below are common beginner scenarios to guide your choice.
- Need for immediate execution: If you must enter or exit a position now, use a market order for a highly liquid stock. For example you might use a market order for $AAPL during regular trading hours because it trades millions of shares daily.
- Want a specific entry or exit price: Use a limit order when you need precision. For example set a buy limit at a support level or a sell limit to capture gains at a target price.
- Trading thinly traded or volatile stocks: Use limit orders to avoid paying a wide spread or suffering large slippage. For example penny stocks or microcap tickers can have spreads of several cents to dollars, so a limit order prevents unexpected fills.
- Earnings, news, or after-hours trading: Avoid market orders near scheduled events, since price movement is unpredictable. Limit orders let you define acceptable price boundaries if you still want exposure.
- Order size considerations: For very large orders relative to average daily volume, consider splitting into smaller limit orders to reduce market impact and get better average pricing.
Real-World Examples
Example 1: Market order with a large-cap stock
Suppose $AAPL is quoted with a bid of 173.45 and an ask of 173.50. You place a market buy for 100 shares. Your broker will fill your order against the best available selling shares, so you will likely pay near 173.50. The execution could split between 173.50 and nearby resting asks, but for a liquid stock your final average price will usually be within a few cents of the ask.
Because the spread is small, the trade completes quickly and predictably. If speed is your priority and you accept small price variation, a market order is fine here.
Example 2: Limit order to control price
Now imagine $TSLA trades at 202.00, but you want to buy only if it drops to 198.00. You place a buy limit at 198.00 for 50 shares. The order will rest on the book until sellers offer shares at 198.00 or lower. If the price never reaches that level by the end of the trading day, your order will expire, leaving you unfilled.
This is exactly what you want when price discipline matters. You won't buy at 202.00, and you keep cash available while waiting for your target price.
Example 3: Market order with an illiquid stock
Consider an illiquid ticker that trades 10,000 shares a day and has a bid of 4.00 and an ask of 5.00. If you submit a market order to buy 5,000 shares, you might pay 5.00 for some shares and higher prices for the rest as the remaining sell orders are at 6.00 or 7.00. Your market order could push the price up dramatically, leading to significant slippage.
In this case a limit order helps you avoid a surprise execution. You might place a buy limit at 5.00 and accept that the order could fill partially or not at all, but you avoid paying much more than expected.
Common Mistakes to Avoid
- Using market orders for thinly traded or volatile stocks, which can cause large slippage and unexpected fills. Avoid this by using limit orders for low-volume tickers.
- Placing a very tight limit order and assuming it will execute, which can leave you sidelined if the market moves past your limit. Consider a wider limit or use a combination of limit and market tactics.
- Forgetting time-in-force settings and letting an unwanted order sit open. Make sure you select day or good-till-canceled appropriately and monitor your orders.
- Not accounting for partial fills, which can leave you with fewer shares than intended and different average cost basis. Check your trade confirmations and be prepared to place follow-up orders if needed.
- Using market orders in after-hours trading, where spreads are wider and liquidity is thinner. Prefer limit orders outside regular trading hours.
FAQ
Q: When should I always use a limit order?
A: Use a limit order when price certainty matters more than speed, such as buying thinly traded stocks, entering a planned trade at a target price, or placing orders outside regular market hours.
Q: Will a market order always get filled immediately?
A: Most market orders for liquid stocks fill immediately, but fills can be delayed or executed at multiple prices during extreme volatility or in very thin markets. Large orders may also be routed and split for best execution.
Q: Can limit orders reduce trading costs?
A: Limit orders can reduce implicit costs like slippage by preventing execution at unfavorable prices, and they can sometimes earn rebates if you add liquidity on certain exchanges. They do not guarantee overall lower costs because missed fills can result in missed opportunities.
Q: What happens if my limit order is only partially filled?
A: If only part of your limit order fills, the remaining unfilled portion stays open according to your time-in-force instructions. You can cancel, modify, or leave the rest to fill later.
Bottom Line
Market orders give you speed, limit orders give you control. For new investors the right choice usually depends on the stock's liquidity, your need for immediate execution, and how sensitive you are to price variation. You now know how each order type works, the common tradeoffs, and practical scenarios to guide your decisions.
Next steps, practice placing both order types in a simulated or small live trade, and review how fills and average prices look on your trade confirmations. At the end of the day the best approach is the one that matches your goals, risk tolerance, and the market conditions you face.
