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 (this is 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. I've written before about a bunch of order terms, but 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: OUCH) 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, and it's trading at a price you're comfortable with and 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 will expire unfilled. This is one of the downsides of limit orders: Sometimes you just don't get into the stock you wanted.

A curious Fool
On our Investing Beginners discussion board the other day, 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 execution?
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 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 -- that will give you an idea of their volatility. For example, on a recent day, General Mills (NYSE: GIS  ) stock ranged from $48.75 to $48.36 per share and Reebok (NYSE: RBK  ) from $57.10 to $56.84. Apple Computer (Nasdaq: AAPL  ) , on the other hand, varied from $56.43 to $54.17, while Hewlett-Packard (NYSE: HPQ  ) ranged from $26.81 to $28.09. Even large, established firms can fluctuate more in price throughout a given day than you might expect. On the day that I checked, for example, Altria Group (NYSE: MO  ) ranged from $75.11 to $73.58 and Boeing (NYSE: BA  ) from $65.75 to $63.70.

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 fits 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." He then offered a strong opinion: "To put in market order is just asking the market maker to pick your pocket."

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, and these articles may also be of interest:

Learn about all our newsletters -- they have many fans and sport some impressive results. Consider trying some out, for free.

SelenaMaranjian's favorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. She owns shares of no company mentioned in this article.Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 499776, ~/Articles/ArticleHandler.aspx, 7/31/2014 10:22:22 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement