Buying Stock Using Market Or Limit Orders

This article brings us back to some really basic parts of investing; buying stocks. When you are looking to purchase shares of stock, there are a few ways to do that. Whether you are talking to your broker or doing the trading online, these same terms apply.

The first term is buying at Market. This means you are willing to pay the current price of the stock as determined by current demand. If you really want to purchase shares at any price and right now, this is the way to do it. You are relinquishing control to the market. Your broker or online program will snatch up the shares you desire at the current market price.

For example, you want to buy 200 shares of XYZ at market price. When you were initially looking at the company, doing your due diligence, the price was at 5 dollars. That seemed like a good entry point, so the next day you put in your Market order. Unknown to you, a few other people saw the same stock and also placed orders. The price was driven up to $7.50, so that is where you purchased your shares. Total cost: $7.50 X 200 shares plus transaction fee of $10 = $1510.

If you really wanted the stock, and $7.50 also fit into your model of a good price, you are the proud owner of 200 shares. If you didn’t want to spend $7.50, too bad, you still own the shares. How could you have avoided this?

The next term is called a Limit order. This works similar to the Market order in that you are still saying you want the 200 shares, but you are calling the price. If you put in the order and said 200 shares at a limit of $5 per share, then $5 is the maximum price you will pay. You are limiting the price. If the price has risen, you will not get the shares.

You can also make this have a defined term by saying the order is good until you cancel it, or until the end of the day. You can define the timeline you are willing to enact that trade. With the Limit order, your cost will be $5 X 200 shares plus transaction fee of $10 = $1010.

Remember, however, that the trade may never take place if the stock doesn’t see the $5 price again. On the other side, if the price is below $5 when you place the order, you will get the lower price and the total cost will be lower. Limit doesn’t say “I will pay $5.” It sets the maximum you are willing to pay.
Obviously there is a lot more to buying stocks than many people realize. The key to success is working to educate yourself on the basics, gain a thorough understanding and then research your potential choices. Using market or limit orders gives you more options as you move ahead.