Limit Order vs. Market Order: What’s The Difference?

One is used for quick transactions, the other to set price boundaries

Orders are the instructions investors give to a broker-dealer to buy or sell a stock, bond, option, or any other traded security. Investors who actively trade stocks, exchange traded funds (ETFs), and options have differing goals, depending on their strategy, and may use different trading mechanisms, such as limit orders or market orders. 

Investors use market orders when they want to quickly buy or sell an entire lot of shares. On the other hand, investors who want to buy or sell at a set price will use limit orders. Market orders and limit orders can also specify when to buy, and what to do if the order can’t be filled.

What’s the Difference Between a Limit Order and a Market Order?

Goal

Market orders are instructions to buy or sell a security immediately, at the current price. While market orders for the average investor generally execute within seconds, the price can change from the quote given. Market conditions can shift rapidly, orders ahead of yours can deplete available supply, news events, and outages can all affect the price at which the market order is filled.

Limit orders include a price, and may have a specified timeframe. Buy limit orders are only filled at or lower than the given price, while sell limits are only filled at the specified price or higher.

Price

Market orders can be filled at any price. However, broker-dealers have to make “reasonable” efforts to get the best terms, a protective requirement called “best execution,” for their clients. The Financial Industry Regulatory Authority (FINRA) regulates how broker-dealers execute orders for their clients. In 2019, FINRA fined Robinhood $1.25 million for violation of best-execution rules.

Note

Limit orders guarantee price. Investors can submit a limit order at any time and leave it open until the price is reached. The limit-order price guarantee is important in volatile markets and for thinly traded securities such as over-the-counter (OTC) stocks. Limit orders are not available for mutual funds.

Execution

Market orders on most exchanges are guaranteed to execute, because there is always a market. Exchanges such as the New York Stock Exchange (NYSE) and Nasdaq have specialists and “market makers” who always stand ready to buy or sell any of the securities those exchanges list.

Limit orders can be “marketable” or “non-marketable.” Marketable limit orders are set at or above the current price for buys, and at or below for sells. Marketable limit orders are executed immediately, like market orders. Non-marketable limit orders are outside the current price range. They usually are sent to a wholesaler or to the exchange for execution.

Stops

Stops are a trigger to submit an order. A “buy stop” is triggered when the market price is at or above the current market price; “sell stops” are activated at or below the current market price. A buy-stop limit order is submitted when the stop price is reached, and filled if the market price remains below the limit. A sell-stop limit is submitted when the stop price is reached and filled if the price remains above the limit.

Which Is Right for You?

If you’ve just started investing, it’s more important to know when market orders may not be a good choice.

Volatile Markets

Market prices can swing dramatically during the course of a trading day. For example, Advanced Micro Devices rose 9% on Nov. 8, 2021, then fell 3.3% the following day. The Cboe Volatility Index (VIX), which tracks the U.S. stock market via the expected volatility of the Standard & Poor’s (S&P) 500 Index through call and put options, is better known as the “fear index.”

Over-the-Counter (OTC)

Over-the-counter stocks don’t trade on any of the large national exchanges like the NYSE or Nasdaq. They are usually small companies, or “microcaps.” Their quotes and the final sales prices can be substantially different because there may not be an active market for the stock.

Low-Liquidity Exchange Traded Funds (ETFs)

ETFs are a basket of stocks or bonds that can be traded on the national exchanges, or in some cases, over the counter. Some ETFs have unusual strategies or holdings, which may make them difficult to sell. Like microcaps, the final sales prices can be very different from the quote.

Note

If you have decided on an active strategy of buying and selling stocks, limit and stop limit orders can help you manage your portfolio.

You can decide on your buy or sell price (entry and exit points) and enter the order as “Good-Til-Canceled (GTC),” in which case the order will remain open until the market catches up with your price.

The Bottom Line

Unless you specify otherwise, your buy/sell order will be submitted as a market order. Market orders generally execute immediately, and are filled at the market price. Speed is the main consideration when choosing a market order. Limit orders and stop limit orders only execute when the market reaches the specified limit and/or stop price. For many investors, limit orders can help manage their active trading by automating their buys and sells according to desired prices.

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1. FINRA. "FINRA Fines Robinhood Financial, LLC $1.25 Million for Best Execution Violations."

2. Fidelity. "Understanding How Mutual Funds, ETFs, and Stocks Trade."

3. Nasdaq. "AMD Historical Data."