Q: I recently opened my first brokerage account and was wondering if I should be using market orders or limit orders when I buy stocks. Which is the better choice?
Market orders instruct your broker to fill your order as soon as possible, and at the best possible price. This is the easiest and quickest way to buy a stock.
On the other hand, limit orders allow you to name the maximum price you pay for a stock.
In the majority of situations, market orders are fine. Most stocks have bid-ask spreads of just a few pennies these days, so if you want to buy a stock right away, you're unlikely to save a significant sum of money by placing a limit order. Even if you could save a few cents per share, it isn't likely to matter much to long-term investors.
Having said that, there are some situations where limit orders can make sense.
For example, if you think a stock is overvalued, a limit order could automate the buying process if the stock drops to what you consider a reasonable level. Let's say that a stock is trading for $90 right now, but you would be more inclined to buy at $80. A limit order can let you set an order that will go through if your target price is reached.
Another situation is if a stock has a wide spread between the bid and ask prices, which is common among smaller and thinly traded stocks. As I write this, one of my stocks has a $0.32 difference between the bid and ask price. By setting a limit order in this case for less than the ask price, you could save yourself a more significant amount of money.
