Market orders and limit orders

Every order is a choice between two things you can’t have at once.

A market order says: buy this now, at whatever the going rate is. It will fill. You don’t know exactly at what price.

A limit order says: buy this at $50 or better. You know the price. It might never fill.

That’s the whole trade-off. Certainty of execution, or certainty of price. Pick one.

A worked example

A stock is showing a bid of $49.98 and an ask of $50.02.

• Send a market buy and you pay about $50.02. Done, immediately.
• Send a limit buy at $50.00 and you wait. If a seller comes down to $50.00 you save two cents a share. If the stock runs to $52 without ever touching your price, you own nothing and you’ve watched the move from the sidelines.

On 40 shares, those two cents are 80p. Not worth agonising over. On a fast-moving stock, missing the entry entirely is worth quite a lot.

Which to use when

The rough guidance:

• Getting out — especially a stop — wants a market order. If you’ve decided you want out, you want out. A limit exit that doesn’t fill leaves you holding exactly the thing you decided to stop holding.
• Getting in can afford a limit. There’s always another trade. Missing an entry costs you an opportunity; a bad fill costs you money.
• Thin, rarely-traded stocks want limits both ways. With few buyers and sellers, a market order can fill horribly far from the last price you saw.

The one that catches people

A stop-limit sounds safer than a stop, and in the situation you most need it, it’s worse.

A stop-limit says “sell if it drops to $45, but not below $44.” If the stock gaps overnight from $47 straight to $40, your stop triggers — and your limit refuses to sell at $40. You’re now holding a position at $40 with no protection, having explicitly arranged not to be sold.

That’s why BotStock’s default stop is a plain stop. A bad fill is unpleasant. No fill, on the day you needed one, is how a small loss becomes a large one.