Market Orders versus Limit Orders
A market order is entered to be executed as soon as possible at the best available price. When you enter a market order to buy or sell a stock you are giving permission to buy or sell at the current ask or bid price. This may not the price at the time you give the order to your broker, it will be the current price as of the time the order is executed. Consequently, with a market order you will not necessarily get the price you expected. And if the trade is for a large number of shares and the stock trades infrequently, a part of your order could be filled at one price and the balance at a less favorable price or even prices.
From an investors perspective these price differences should be inconsequential. The decision to own or liquidate a specific stock are based on much broader criteria, and any nominal price difference should have modest effects on the strategy. These price differences are of greater concern to a trading strategy, of course. But from an investors strategy if these small price differences make or break the position, then you are picking the wrong stock.
Limit orders lend themselves more to so called “technical” or trading strategies than investing strategies, but they can be useful for an investor in certain circumstances. Usually this occurs when you anticipate a stock breaking out of a trading channel or range and will only want the order executed when the price has moved enough to confirm the breakout. If you buy inside or too close to the trading channel you may find that the price simply bounces back and forth within the channel. As an investor this is not very helpful.
A limit order is an order entered to be execute as soon as possible at the best available price, not beyond a certain limit. It sets a maximum price for orders to buy or a minimum price for orders to sell. It is very important to remember that a limit order cannot be executed beyond its limit, therefore it may not be executed at all. As an investor you might miss an opportunity because of a bad guess as to an execution price.
Other Common Order Types (GTC, Day, AON)
In today’s market environment order qualifiers are not very relevant in the OTC. But occasionally they can be useful, at least you should know what they mean.
All orders are “day” orders unless they are specified otherwise. A day order will remain in the system until executed or the end of that trading day if not executed. More often than not this is sufficient order duration.
The only other order duration is Good ‘Til Canceled (GTC). GTC orders remain in the system until executed. Market orders do not need to be GTC because they are executed as soon as possible without limit.
All orders are considered to be entered to be executed for all the shares or any part of the shares unless specified otherwise. OTC there is only one other alternative and that is All or None (AON).