Limit Orders vs. Market Orders

When you buy stock though an online program (or even through a broker), one of the most important questions you need to know the answer to is if you want to place a Limit Order or a Market Order. Your decision could be the difference between owning the stock and not owning the stock. Or owning the stock for the price you wanted to pay….and owning a stock at a price you didn't choose….

Market Order

When you place a market order, you're basically handing the final price over to the broker. If you choose to buy when a stock is at $50.00 but you place a market order, don't be surprised if you find out you bought your stock at $55.00. It means "Buy it now! I don't care if it turns out to be a little more expensive…I trust you Mr. Computer Broker Man somewhere on the other end of the line!"

Pros: If you want to own the stock as soon as possible because you think something is going to happen or the stock isn't going to be available anymore.

Cons: It's not a smart way to trade. You could pay more than the stock is worth and have no way of saying, "Hey, you can't do that!" It's rare that the price jumps dramatically, but it can happen.

Limit Orders

When you place a Limit Order, you say what you are going to pay for the stock. If you place an order for $50.00 and when you click "buy" the price has gone up to $50.01 – your order just doesn't go through. When and if the price falls back down to $50.00, your order will automatically go through. A limit order usually stays in effect for 60 days or until it is cancelled. In most cases you don't pay the trading fee unless you actually make the trade, so you're not out any money.

Pros: Save money and don't get fleeced by a lazy stockbroker that gives someone else too much money for your stock.

Cons: If you want to own the stock right this very second, a limit order could have you worrying and wondering if the stock price will drop back down.

Unless you're messing around with some serious daytrading, it's best to stick with limit orders. They carry less risk of you spending more money than you can afford.

My first two trades were market trades and on one I paid almost twice the price of the stock when I wanted to buy it. Today I made a limit order trade and it did not go through by the close of the market. It's a little nerve wracking having an open order out there, but I don't want to pay more than the price I saw when I made the order…I'd rather wait.

Jennifer Gniadecki is a freelance writer in love with finances and investing.Links to her blogs as well as her portfolio can be found on her web-site!

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