Market Order vs Limit Order: What's The Difference?

Beginner

2024-08-23

So, you just finished watching The Wolf of Wall Street and you want to become trader! Checked all the boxes, signed up for a profile on a cryptocurrency exchange (like Toobit, perhaps eh?) but find yourself confused about where to go from here? We got you!

In the article, we’ll dissect what orders mean in trading: AKA the instructions you send to an exchange to buy and sell assets. As you’ll see shortly, there are two main types: limit orders and market orders. However, these are merely qualities used to describe commands.

Definition of Market Order

A market order is an instruction to buy or sell a cryptocurrency immediately at the best available current price. It’s the quickest way to enter or exit a position.

How Does a Market Order Work?

When you place a market order, your broker will execute the order at the next available price when the order reaches the market. This means you don't have control over the exact price you'll pay or receive.

For example, if you place a market order to buy 100 shares of a stock, your broker will buy the shares at the lowest available asking price at that moment. Conversely, if you place a market order to sell 100 shares, your broker will sell the shares at the highest available bid price.

When to Use a Market Order?

Market orders are typically used in the following situations:

Time-sensitive trades: If you need to buy or sell a security quickly, a market order is the best option.
Market trends: If you're confident about the overall direction of the market, a market order can help you capitalize on price movements.

Important to remember:

Market orders offer speed but lack price control.
During periods of high volatility, market orders can result in significant price slippage, meaning you might pay more for a buy order or receive less for a sell order than the current market price.

Definition of Limit Orders

A limit order is a type of investment order that instructs a broker to buy or sell a security at a specific price or better. Unlike a market order, which executes immediately at the current market price, a limit order gives you more control over the price at which you buy or sell.

What Is a Limit Order?

A limit order is a request to buy or sell a security at a predetermined price or better. It comes with two main variations:

Buy limit order: This instructs the broker to buy a security at a specified price or lower.
Sell limit order: This instructs the broker to sell a security at a specified price or higher.

How Does a Limit Order Work?

A limit order remains active until it is executed or canceled. If the specified price is reached, the order is filled. However, there's no guarantee that the order will be executed, especially if the market moves quickly or there's insufficient volume at the limit price.

For example, if you place a buy limit order for a stock at $50, the order will only be executed if the stock price drops to $50 or lower. Conversely, a sell limit order for $60 will only be executed if the stock price rises to $60 or higher.

When to Use a Limit Order?

Limit orders are particularly useful in the following situations:

Price sensitivity: If you have a specific price in mind for buying or selling a security, a limit order can help you avoid paying more or selling for less than your desired price.
Market volatility: During periods of high market volatility, limit orders can help you protect against sudden price fluctuations.
Long-term investing: If you're investing for the long term and have a specific price target, a limit order can be a useful tool to execute your strategy.

It's important to note that while limit orders offer more control over price, they also increase the risk of your order not being filled. Therefore, it's essential to consider your investment goals and market conditions carefully when using limit orders.

Differences Between Market Orders & Limit Orders

Execution Speed

Market Order: Executed almost instantly since they match with existing buy or sell orders in the order book. This makes them ideal for traders who prioritize speed over price precision.
Limit Order: May take longer to execute or may not execute at all if the market price never reaches the specified limit price. This makes them more suitable for traders who prioritize price over speed.

Price Certainty

Market Order: With a market order, you get the certainty that your order will be filled quickly, but you might not get the exact price you anticipated. The final price could be higher or lower depending on market fluctuations and liquidity.
Limit Order: Provide price certainty because they only execute at your specified price or better. However, there’s no guarantee that the order will be filled if the market doesn’t reach your limit price.

Use Cases in Trading

Market Order

Immediate Execution: When you need to enter or exit a position quickly due to sudden market movements.
High Liquidity Markets: Best used in highly liquid markets where the difference between the bid and ask price (spread) is minimal.

Limit Order

Strategic Entry/Exit: When you want to buy at a lower price or sell at a higher price and are willing to wait for the market to meet your conditions.
Managing Risk: Useful for setting up trades that align with your risk management strategy, such as setting a sell limit order above your purchase price to lock in profits.

Costs and Fees

Market Order: Can sometimes result in higher trading fees due to slippage, especially in low liquidity markets. Slippage occurs when the final execution price differs from the expected price.
Limit Order: Generally incur lower fees because they often contribute liquidity to the market, and some exchanges offer lower fees for limit orders. However, if your order doesn’t execute, you might miss out on potential trading opportunities.

Market Impact

Market Order: Since market orders are executed immediately, they can impact the market price, especially if the order size is large compared to the available liquidity. This can cause short-term price fluctuations.
Limit Order: Limit orders do not have an immediate impact on market prices since they only execute when the market reaches the specified price. This makes them less likely to cause sudden market movements.

Flexibility

Market Order: Market orders are straightforward with no special conditions, making them simple to use but less flexible in terms of controlling execution price.
Limit Order: Limit orders offer more flexibility with various conditions such as “fill or kill” (execute immediately or cancel) and “good till canceled” (remain active until canceled), allowing traders to customize their strategies.

Closing Thoughts

We hope that this article helped you understand the differences between market orders and limit orders is crucial for effective crypto trading. Market orders prioritize speed and certainty of execution, making them ideal for quick trades in volatile markets. Limit orders, while slower, offer price precision and lower fees, making them suitable for strategic and risk-managed trading. By choosing the right order type based on your trading goals and market conditions, you can optimize your trading strategy and enhance your overall trading experience.

Disclaimer: This article is presented for general information and educational purposes only. It is not a representation or warranty of any kind. It should NOT be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. Users should seek their own advice from appropriate professional advisors. Digital asset prices can be volatile and the value of an investment may go down or up. All users are solely responsible for their own investment decisions and Toobit Academy is not liable for any losses that may incur. This material on Toobit Academy should not be construed as financial, legal or other professional advice.