Buying shares uncovered: The difference between market orders and limit orders

Julie Brownlee, Fsp Invest, 04 Jun. 2014

Tags: buying shares, limit order, market order, what is limit order, what is market order, stock brokers, stock broker, orders

You’ve done your research. You’ve picked one share you think it going to be a good long-term investment. All you have to do now is get on the phone to your stockbroker and buy it. But before you can phone, you need to know whether you’re going to give a market order or a limit order. So what’s the difference between a market order and a limit order? Read on to find out…

What is a market order when buying shares?

If you give your stockbroker a market order, you’re giving him an order to buy the shares straight away.

As part of your broker’s job, he must find you the best possible price. Once he does this, he will buy the shares you want at this price.

What is a limit order when buying shares?

Giving your stockbroker a limit order is different to a market order. A limit order is lower than the current market price of a share.

The limit price is the most you’re willing to pay for a share. And your broker can only buy the shares if he can get them at that price or below that price.

By placing a limit order, you hope the price of the share is going to fall back so you can buy it at a cheaper price. You’re bullish on the overall prospects of the share, but you hope it will pullback before going higher.

But by opting for this method of buying shares, there’s a chance the share price won’t come down to the price you’re willing to pay. And you won’t get the shares.

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An example of a limit order in action

Let’s say you want to buy 100 shares of Company ABC. It’s currently trading at R500 a share. You think the share is overvalued at R500, but you think at R480 the share is a good buy.

You place a buy limit order at R480 on 100 shares of Company ABC. As long as the share comes down to the limit price, the limit order then becomes a market order and is filled at R480 or below.

So there you have it, the difference between market orders and limit orders.

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