Limit orders vs market orders

lambchops

Can anyone comment on the danger, or not, of Market Orders vs Limit Orders?

markd

The benefit of the market order is, you WILL get filled for your entire order. A drawback is, you don't know at what price. You would use a market order if you are certain of the market's direction, and you definitely want to participate (or escape). Another drawback is, you have to be there in real time to submit the order (unless you put the order in overnight, in which case it will execute on or "near" the open). Yet a third drawback is, orders are (supposed to be) executed oldest first. A market order will be very junior, meaning the price could move some before your order gets priority.

One benefit of a limit order is you know at what price at least part of your order might be filled. But you don't know how much of it will be filled, if any.
You would use a limit order when you believe a future price would be attractive if it occurs, but a fill is not an urgent necessity. If you don't want a partial fill, you can specify "fill or kill". Another benefit is that you don't have to be at your screen when the order executes. A third benefit is, the earlier you put in your limit order, the more likely it is to be executed first. This may partly offset the disadvantage of an uncertainty about the fill.

Maybe others can add from their experience.

lambchops

Thanks Markd, a lot to consider.

brucefleet

Just to add to Mark's comments...I usually use limit orders on the buy side because I want my buy price to be a couple of ticks above the setup price as confirmation, and stop orders (market) on the sell side. Never use a stop limit to sell as you can easily get skipped (or price jumped) and experience a much larger loss.

markd

@lambchops @brucefleet I need to correct some misinformation in my earlier post. While a limit order placed earlier will execute before a limit order placed later, a market order will execute ahead of any limit order at the same price - according to this AAII interview with TD Ameritrade:

aaii.com/journal/article/how-your-buy-and-sell-orders-get-filled.touch

Here's the relevant Q&A:

CR: How does it work if somebody has a limit order, say for $17.00, and the stock is trading at $17.25 and then drops to $17.00, but someone else comes in with a market order as the stock is dropping? Which takes precedence?

CN: Market orders always take precedence over limit orders because a market order says, “I want to buy at the best available market price.” So a market order will jump in front of a limit order. If you’re a client wanting to trade at, say, $17.25, and the stock right away looks like it’s going to come up on your price and your limit order is going to get filled, then all of a sudden a market order comes in, that market order is going to take precedence and actually be filled before your limit order, because it’s the next best available price in line.