Market Order vs Limit Order: Detailed Comparison with Examples
Understanding the difference between market order and limit order is essential for anyone involved in stock trading or preparing for commerce exams. These two order types affect how and when your trades are executed. Grasping their working is crucial for students, competitive exam aspirants, and future investors.
| Feature | Market Order | Limit Order |
|---|---|---|
| Definition | Executes instantly at the best available market price | Executes only at a specific price or better set by you |
| What you specify | Only quantity | Quantity and exact price |
| Execution guarantee | Almost always filled immediately | Filled only if your price is reached |
| Best for | Speed and certainty of trade | Price control and volatile markets |
| Example | Buying 10 shares of ABC at current price, order fills instantly | Buying 10 shares of ABC at ₹500, fills only when price hits ₹500 |
Meaning of Market Order and Limit Order
A market order means you buy or sell a security instantly at the current best price. A limit order lets you buy or sell only when the price matches your chosen value. The main difference between market order and limit order is speed versus price control.
How Does a Market Order Work?
When you place a market order, you only mention the number of shares you want to buy or sell. The trade executes at the current live price. This type is best when fast execution matters more than the exact price.
Example of Market Order
- You want to buy 20 shares of Tata Motors. The live price is ₹800.
- You place a market order for 20 shares.
- Your order matches with sellers at that moment, and the trade is completed instantly at the ongoing prices.
What to Know Before Placing a Market Order
Market orders are quick but do not guarantee the exact price seen on screen. A small lag can cause the executed price to differ, especially in a volatile market. They are most suitable for highly liquid stocks.
How Does a Limit Order Work?
With a limit order, you specify both the quantity and the price at which you want to buy or sell. The order will only execute if the market price reaches or improves upon your chosen limit. This gives you better price control.
Stepwise Process for a Limit Order
- Decide on the quantity and the target price.
- Place a limit order with your broker/trading app.
- The order stays open until the market price hits your chosen price.
- If the price is not reached, your order may remain unfilled.
Example of Limit Order
- You wish to buy 15 shares of Infosys but only if the price drops to ₹1,300.
- You place a limit buy order at ₹1,300.
- If Infosys shares fall to ₹1,300, your order is executed. If not, it remains pending.
Key Differences: Market Order vs Limit Order
Here is a summary of the difference between market order and limit order for easy revision and exam reference:
| Market Order | Limit Order |
|---|---|
| Specifies only quantity, not price | Specifies both quantity and price |
| Executed instantly at best current price | Executed at chosen price or better, if available |
| Higher execution certainty | Execution not guaranteed if price not matched |
| Best for urgent, high-liquid trades | Best for price-sensitive, less urgent trades |
| Risk of price slippage | No slippage but risk of no fill |
Market Order vs Limit Order: Which Should You Choose?
Choose a market order if you want immediate execution, especially for actively traded shares or during market hours. Choose a limit order if you have a target price and can wait, or to protect yourself during high volatility. Always assess your trading goals and market conditions before deciding.
- Long-term investors often prefer market orders for ease.
- Active traders who watch prices may use limit orders for better control.
- For thinly traded or volatile stocks, limit orders prevent unexpected price changes.
Related Concepts: Stop Orders, Partial Fills, and GTC
Apart from market order and limit order, you may encounter related types such as:
- Stop Order: Converts to a market order when a set price is reached, often used for stop-loss strategies.
- Fill-or-Kill (FOK): Order must be filled instantly in full or is canceled. Useful for large trades where partial fills are not acceptable.
- Good-Til-Cancelled (GTC): Limit orders that remain active until executed or canceled (up to broker's maximum period).
- Partial Fill: Sometimes only part of your order is filled if not enough shares are available at the price.
Platforms like Zerodha or Groww allow easy setup of these order types for Indian stocks. To learn more about order execution in markets, see Financial Market and Stock Exchange.
Applications in Exams, Business, and Investing
This topic is commonly asked in school Commerce and competitive exams. Knowing when to use each order type can improve your investment decisions. In real business, correct use of orders can impact profits, especially during volatile or low-liquidity periods. For foundational concepts, review Investment and Functions of Financial Management on Vedantu.
In summary, the difference between market order and limit order determines how your trade is executed—market order gives speed, while limit order gives price control. Both are valuable tools in trading and investment strategies. Choosing the right order type helps students perform better in exams and practice smarter investing in the real world.
FAQs on Difference Between Market Order and Limit Order
1. What is the difference between a market order and a limit order?
A market order executes a buy or sell instantly at the best available price, prioritizing speed. A limit order lets you set a specific price; your trade happens only when the market hits that price, prioritizing price control. The key difference lies in whether you prioritize speed of execution or price certainty.
2. Which is better: limit order or market order for beginners?
For beginners, limit orders are often safer. They help you avoid potentially unfavorable prices caused by market fluctuations. While market orders are quicker, they can lead to higher costs if the market price shifts significantly between placing the order and execution. Consider your risk tolerance and understanding of market dynamics when choosing.
3. What happens if a limit order is higher than the current market price?
If your limit order to buy is higher than the current market price, your order won't execute immediately. It will remain pending until the market price rises to meet or exceed your specified limit price, or until you cancel it. For a sell order, the opposite applies. Your order remains open until the market price drops to your specified limit price or you cancel it.
4. How are market orders and limit orders used in the Zerodha platform?
Zerodha, like most trading platforms, supports both market and limit orders. You'll find options to specify order types when placing trades. Market orders execute instantly at the best available price, while limit orders let you control the execution price. The platform will guide you through the process.
5. Can a limit order guarantee execution at my chosen price?
A limit order doesn't guarantee execution at your exact price, although it increases the likelihood. If the market price doesn't reach your limit before your order expires or is cancelled, it may not execute at all. This differs from a market order, which ensures execution but not at a specific price.
6. Which is better, limit order or market order?
The best choice between a market and limit order depends on your trading goals. Market orders are best for speed, while limit orders offer more price control. Beginners often prefer limit orders to mitigate risk.
7. What is the difference between a market order, limit order, and stop order?
A market order executes immediately at the best available price. A limit order executes only when the price reaches your specified level. A stop order becomes a market order when the price hits a certain trigger point, often used to limit losses or secure profits.
8. What is the difference between market limit and stop orders?
A market order executes at the best available price immediately. A limit order executes only at or better than a specified price. A stop order triggers a market order when a specific price is reached, often used to limit losses or lock in profits. The key difference is in the price control and execution triggers.
9. What if a limit order is higher than the market price?
If your buy limit order is higher than the current market price, it will remain pending until the market price rises to your specified limit or you cancel it. Conversely, a sell limit order above the market price will wait for a price drop to execute.
10. How do Good-Til-Cancelled (GTC) and Day orders differ in real-life trading?
A GTC (Good-Til-Cancelled) order remains active until it's filled or you cancel it. A Day order is valid only for the current trading day; if not filled, it automatically expires. GTC orders are suitable for long-term strategies, while Day orders are for shorter-term trades.
11. When might using only market orders be a risk in low liquidity stocks?
Using only market orders for low liquidity stocks (stocks with few buyers and sellers) can be risky. The lack of trading volume may result in slippage, where you get a less favorable price than expected due to a wider bid-ask spread. Limit orders provide better price control in such scenarios.
12. What is a Fill-or-Kill (FOK) order and when should you use it over market/limit orders?
A Fill-or-Kill (FOK) order is an advanced order type that either executes completely or is immediately cancelled if it cannot be filled in its entirety. Use a FOK order when you need immediate and complete execution, prioritizing total fill over partial execution. It's rarely used by beginners.
13. Why are limit orders sometimes preferred during market volatility?
Limit orders are preferred during market volatility because they provide more control over execution prices. They help avoid potentially unfavorable prices resulting from rapid price swings during periods of uncertainty. Market orders can be disadvantageous in such situations due to slippage.
