Market or Limit Order?

You know about all the different kinds of orders that you can place with your broker, right? There's "Speak up, please," for example. And if a strange broker calls you up at dinnertime to urge you to buy a terrific stock that's sure to make you a lot of money (also known as a cold call), the best order to place is, "Get lost!"

But for us investors, the kinds of orders that matter most are the ones we place when we buy or sell stocks. While it helps to be familiar with the many order terms, it's worth examining the two biggies: market and limit orders.

If you place a market order, you're essentially asking your broker to buy or sell a given security as soon as possible, at the best available price. This is the most common kind of order, and the simplest.

With a limit order, you state your desire to buy this or that, but only at a certain or better price. So if you place a limit order to buy 50 shares of the Home Surgery Kits Co. (Ticker: OUCHH) at $45, and the stock is trading around $48, your order won't be filled until or unless the stock falls to $45 (or lower).

It depends ...
For many trades, market orders are good enough. If you know you want to own shares of a certain company fairly soon, it's trading at a price you're comfortable with, and it's not a very volatile stock, a market order should serve you well.

You might use a limit order if you want to own a certain stock but think it's overvalued now. If so, you could set a lower "limit" at which you'll buy. If it reaches that limit, you'll buy the stock. If not, your order would expire unfilled. This is one of the downsides of limit orders: Sometimes you just don't get the stock you wanted.

A curious Fool
On our Investing Beginners discussion board, some Fool Community members responded when a Fool newsletter subscriber asked a good question: "I am new to investing. When you make your monthly stock recommendations, should I place a market or limit order?"

ImAGolfer said: "I'm sure you will receive several different opinions on this but my experience shows I missed a great buying opportunity one time when I used a limit order. Additionally, limit orders usually have a higher transaction fee. On the other hand, when selling, I've used limit orders to my benefit. I was not in a hurry for the proceeds of the transaction, so the order just sat there till it executed and it worked great. I guess it depends on your situation."

Ensure the price or the trade?
Jbking offered a good clarifying question: "I think you have to ask yourself which is more important: to ensure the price or to ensure the execution? Is part of your strategy to buy stock ABC at a specific price or better, or will you pay a sky-high price for the alleged good stock?" He also offered a downside to market orders: "... if you place a market order when the market is closed, you could get hit by the possible gap when the stock opens, ya know?"

Matt1344 added: "I agree with jbking. I subscribe to [Motley Fool] Hidden Gems and Inside Value letters, also used to get Stock Advisor and may do so again. ... You can check with your broker for specifics. I use Fidelity, and limit orders are the same price as market orders."

(Drop by our Broker Center to compare a handful of respectable brokerages, several of which charge the same fee for both kinds of orders.)

Matt1344 also noted, regarding recommended stocks from our newsletters: "There have been a few recommendations that popped up and never came back down, but I believe a much larger percentage of recommendations have returned to the recommended price and eventually gone even lower. Some folks choose to wait for the dust to settle and buy at lower-than-recommended prices ... helps their returns."

Consider the stock
bogwan offered a simple rule: "If you are buying a stock like IBM (NYSE: IBM  ) , then market is the way to go. If you are buying a small-cap that trades only a few shares a day, then put in a limit or you might get a really bad price."

This is worth considering. Look up some stocks that interest you and see how much their prices varied during the last trading day or period of trading days -- that will give you a broad idea of their price volatility. On any given day, the price of a stock has the potential to fluctuate greatly, especially if an event happened that might affect the company. For example, last week when Aeropostale (NYSE: ARO  ) reported company earnings, the stock price increased 6.8% from $29.12 to $31.10. However the price fell by 3.7% over the next two days to $29.96.

Using recommendations
Bighairymike advised: "When you receive the monthly stock recommendations, the only thing you should do is start reading. Check other data sources. Study the stock. Look at balance sheets, cash flows, press releases. Determine how the recommended stocks fit into your sector strategy, your asset allocations, your tax strategy. In other words, do your due diligence. Then when you do decide to buy, always use a limit order. If your broker charges more for limit orders, then you have the wrong broker. Look at the bid-ask for the stock. Put your limit order in at the ask price and you will generally get an execution." While limit orders work for some investors, as mentioned earlier, with a limit order there is a chance that your order will not be executed.

Learn more
As you learn more about investing, be sure to learn more about brokerages, too, and how they work. Doing so can help you use them more effectively. Our Broker Center is a great place to start. Here you can find the answers to broker-related questions, compare discount brokerages, and determine what to look for in a brokerage.

Want some new stock ideas? See what Motley Fool CAPS players -- now 14,000 strong -- think of the company you're interested in.

Foolish research associate Katrina Chan updated this article, which was originally written by SelenaMaranjian. Katrina doesn't own shares in any companies mentioned in this article. The Motley Fool is Fools writing for Fools.


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