What is Market and Limit Order? – Knowing How to Buy and
Sell Stocks Could Save You Money – Also Stop Orders – All or None – Good
Till Cancelled and Day Orders
April 20th 2006
A market order is a order to buy or sell immediately, at the best price
at that time. There is no guarantee of price. This means that if you
are going to buy stock, it will likely be at or near the ask price of
the stock. If you are selling stock you will likely get a price at or
near the bid price.
It is important to remember that the last-traded price is not
necessarily the price at which the market order will be executed.
Asking and bidding prices may vary. In a fast moving market, the price
at which you actually get your sale or buy executed, may deviate more
than a less volatile market (as compared to the last-traded price).
Investors that want to immediately buy or sell a stock, will use a
market order to expedite the transaction. Investors that are not in such
a big hurry may want to use a limit order. Here, the maximum or minimum
price at which you are willing to buy or sell can be set.
Limit orders can cost more than market orders. The added sales
commission cost could make selling or buying using a limit order more
expensive. Here is an example:
Let’s say you want to buy 10 shares of XYZ Company. The stock is
currently being sold at $20 per share, but you want to buy it at
$19.90. By placing a market order for the 10 shares you may get the
stock for $200 (10 X $20). If you add a $10 commission to the buy, the
total cost would be $210.
Let’s say the brokerage firm charges $5 more for a limit order. If the
$19.90 offer is accepted then your total cost would be $199 (10 X
$19.90) plus $15 commission, or $214. You just spent $4 more for that
purchase. There is no guarantee your $19.90 offer will be accepted
either. The price could start rising. In this case, you lost the
opportunity to buy.
There are other types of orders. A Stop Order might be used before you
take a vacation, or if you don’t have the time to watch the market.
Here is how it works: Let’s say the value of XYZ Company increased to
$30 per share. You may want to place a stop-loss sell order at $29. In
this case the order would be inactive until the price of the share
reached $29 or lower. The order would then turn into a market order.
The All or None (AON) order are typically used by investors who buy
penny stocks. With AON orders you get either the entire quantity of
stock you requested or none at all. If you want to buy 1000 shares at a
preferred price, but only 500 shares are up for sale at that time, the
purchase is not made. If a AON order is not made then the 500 share
purchase would have been made.
Typically brokerage firms will keep an order open (active) for 90 days.
If a Good Till Cancelled (GTC) order is placed, the order remains open
until you cancel it. If you do not specify a time frame for your GTC
order, then the order will typically be set for one day. These orders
are called Day Orders. If the transaction is not filled that day then
you will need to re-enter the order the following trading day.
By Dan Wilson
Books on Investing
Keywords and misspelling: investmint investing intesters
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