· Listen
When you place a trade, your brokerage asks what kind of order you want. The two basic ones are market orders and limit orders. Knowing the difference will save you from accidentally overpaying.
Market order
'Buy this, right now, at whatever the next available price is.' The trade happens almost instantly. Simple, fast, and the right choice for big liquid stocks like Apple or an S&P 500 ETF, where the price barely moves between bid and ask.
Limit order
'Buy this, but only if the price is at or below my limit.' You set the maximum you'll pay. The trade only fills if a seller meets your price. Slower, but you control the price.
When the choice matters
On thinly traded stocks (small companies, low-volume ETFs, anything outside normal market hours), the gap between bid and ask can be wide. A market order could fill at a much worse price than you expected. Limit orders protect you from this.
What this lesson is NOT
This is about the single moment when you place a trade, not a trading strategy. For long-term buying of broad funds the order type rarely matters; it matters most on thin or fast-moving stocks.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
What is a market order?
- 2.
What is a limit order?
- 3.
According to the lesson, when is a market order generally a fine choice?
- 4.
Why are limit orders especially important on thinly-traded stocks?
- 5.
Per the lesson's warning callout, what should you always use during after-hours trading or on small-cap stocks?
0 of 5 answered