The difference between a market order and limit order

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Stop orders are the simpler of the two. Stop orders are triggered when the market trades at or through the stop price depending upon trigger method, the default for non-NASDAQ listed stock is last priceand then a market order is transmitted to the exchange. A buy stop is placed stock trading limit price the current market price. A sell stop order is placed below the current market price. Stop orders may get traders in or out of the market. When a buy stop order triggers, the market order is transmitted and you will pay the prevailing ask price in the market when received.

When a sell stop order triggers, the market order is transmitted and you will pay the prevailing bid price in the market when received. Stop limit orders are slightly more complicated. Account holders will set two prices with a stop limit order; the stop price and the limit price. When the stop price is triggered, the limit order is sent to the exchange. A limit stock trading limit price will then be working, at or better than the limit price you entered.

With a stop limit order traders are guaranteed that, if they receive an execution, it will be at the price they indicated or better. The risk associated with a stop limit order is that the stock trading limit price order may not be marketable and, thus, no execution may occur.

A sell stop limit order is placed below the current market price. When the stop price is triggered, the limit stock trading limit price is sent to the exchange and a sell limit order is now working at, or higher than, the price you entered.

A buy stop limit order is placed above the current market price. When the stop price is triggered, the limit order is sent to the exchange and a buy limit order is now working at or lower than the price you entered. Be aware that if you enter these orders on the unintended side of the market, you could be filled immediately at the current market price.

Consider for example a buy stop order. Buy stop orders should be entered above the current market price. When the market trades up to or through the stop price, a market order is sent. If an account holder were to incorrectly enter a buy stop order below the current market price, the system would correctly note that the market had already traded through the stop price, and a market order would be instantly sent.

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One of the ways people use these advanced strategies is the utilization of different order types. Market orders are the simplest, most intuitive order types. A market order simply means that you want the trade to be executed immediately at the best available price in the market. If the market for a particular stock, ETF, or other security is liquid, market buy orders often get executed almost immediately at or near the ask price.

The advantage of a market order is speed. If you want in or out of a position immediately, a market order is the way to go.

The disadvantage of a market order is price. Depending on the size of the order and the number of available shares at the ask price, your order may not get the exact price you were hoping to get filled at. The other most common type of order is a limit order.

The advantage of limit orders is that you have complete control over the price at which a trade is executed. If the stock never reaches the limit price, the order will never get executed at all.

In a way, stop orders are almost a combination of a limit order and a market order. Much like a limit order, a stop order allows you to select a price at which the order will be triggered.

However, like a market order, once the order is triggered, it is immediately fully executed at market price. Stop loss orders are sell orders with a stop price slightly below the current share price of the stock. A trailing stop order allows the trader to set a stop loss price at a certain percentage or dollar amount below the current share price.

As the stock continues to rise, the trailing stop will rise along with it, maintaining the specified spread. However, if the stock falls, the trailing stop will remain steady until it is triggered. In addition to the three most common order types mentioned above, traders can also combine order types to execute specific trading ideas.

For example, a stop limit order can allow traders to buy or sell stocks only in a particular price range. A market If Touched order is similar to a stop sell order, except it is placed above the current share price rather than below it. These If Touched orders provide traders with another way to take advantage of large, short-lived swings in share price. So before you pull the trigger, take a second to consider which one is right for you.

This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author.

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