Difference between Limit and Market Order| Espresso

Difference between Limit and Market Order

In 2024, the Indian stock market is on an upward trajеctory, drivеn by robust domеstic growth and modеratе inflation. With thе NIFTY and SENSEX indicеs forеcasting ovеr 10% rеturns, investors and traders are eager to define thеir trading stratеgiеs. Amidst this dynamic еnvironmеnt, understanding market terminologies like Account and Trading or Analysis and Research, etc., becomes еssеntial. Kеy among these is thе difference between limit and market order. Limit ordеrs lеt invеstors sеt a spеcific pricе for transactions, whilе markеt ordеrs execute trades at thе bеst availablе pricе. Understanding thеsе concepts can help investors navigate thе volatile market and make well informed decisions.

Published on 24 July 2024

What is a Market Order?

A markеt ordеr in thе Indian stock еxchangе is a type of transaction whеrе sharеs arе bought or sold immеdiatеly at thе current market price. It ensures instant execution if a buyеr or sеllеr is availablе. Howеvеr, thе dynamic naturе of thе markеt might causе thе final execution price to differ from thе initial pricе. Market orders are commonly used for thеir spееd and simplicity, facilitating quick tradеs.

How Does a Market Order Work?

A market order is an instruction to a broker to buy or sell a stock or other asset immediately at the best available current price. In the Indian stock exchange, a market order is the most common type of what is a market order used by investors to buy or sell shares.

How a Market Order Works:

 

  • Immediate Execution: A market order is executed immediately, meaning the trade is completed as soon as possible at the current market price.
  • Best Available Price: The broker will execute the trade at the best available price in the market, which may be the current bid or ask price.
  • No Price Guarantee: A market order does not guarantee a specific price, as the trade is executed at the best available price in the market.
  • High Liquidity: Market orders are suitable for large-cap stocks, futures, or ETFs, which have high liquidity and are easily traded.

 

Example:

Suppose you want to buy 100 shares of XYZ Ltd. at the current market price. You place a market order with your broker. The current market price is ₹500. Your broker will execute the trade immediately, buying 100 shares of XYZ Ltd. at ₹500.

What is a Limit Order?

A limit order is a type of order that allows you to buy or sell a security at a specific price or better. This means that the order will only be executed if the market price reaches or exceeds the specified price. In the Indian stock exchange, limit orders can be used to buy or sell shares of publicly traded companies.

How Limit Orders Work in the Indian Stock Exchange

Here’s an example of how a limit order works in the Indian stock exchange:

  • Assume you want to buy shares of XYZ Ltd. at a price of ₹100 or lower.
  • You place a buy limit order at ₹100 with your broker.
  • The order is stored in the exchange’s order book until the market price of XYZ Ltd. reaches or exceeds ₹100.
  • When the market price reaches ₹100, the order is executed, and you buy the shares at the specified price of ₹100 or lower.
  • If the market price does not reach ₹100, the order will not be executed, and you will not buy the shares.

Key characteristics of Limit Orders:

  • The order will only be executed if the security’s market price reaches or exceeds the specified limit price.
  • The order can be placed to buy or sell a security.
  • The order can be placed at a specific price or better (i.e., at a price that is equal to or better than the specified price).
  • The order can be placed for a specific quantity of shares.
  • The order can be placed for a specific duration (e.g., day-only, good till canceled, or good till filled).

Market Order vs Limit Order: Which One Should You Choose

Consider your trading goals, time horizon, and current market conditions when deciding which order to use. Here are some factors to consider:

  • Speed of execution: A Market Order might be the better choice if you need to enter or exit a position quickly.
  • Price control: If you want to buy or sell a stock at a specific price, a Limit Order can help you achieve that.
  • Risk management: If you’re concerned about losses, a Limit Order can help limit your exposure to market fluctuations.
  • Market conditions: If the market is volatile, a Limit Order might be a better choice to avoid getting caught in a rapid price move.

Tips for Indian Stock Exchange Investors

  • Use Market Orders for short-term trades: A Market Order can be a good choice if you’re looking to make a quick profit or exit a position rapidly.
  • Use Limit Orders for long-term trades: If you’re holding a stock for the long term, a Limit Order can help you lock in profits or avoid losses.
  • Monitor market conditions: Monitor market volatility and adjust your order type accordingly.
  • Consult with a financial advisor/broker: If you’re unsure about which order to use, consulting with a financial advisor/broker can provide insights based on your circumstances and trading strategy.

Conclusion

In conclusion, market orders are more suited when aiming to buy/sell shares quickly, as they are governed by the condition of the market and not the pre-decided share price. It is well suited for individuals looking for long term investment and are not bothered by short term market fluctuations. On the other hand, limit order might make sense for experienced individuals/investors who want to take advantage of the volatility of the market and are looking to gain profit from the short term trades. Sign-up with Espresso, one of the best trading apps in 2024, offering a wide range of trading options, including bootcamps, equipping individuals with practical skill to get started in the share market.

Chandresh Khona
Team Espresso

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