Market & Limit Orders

The benefits and risks of market orders vs. limit orders.

When you trade stocks, you'll choose either a market order or a limit order. Learn the differences between the two, and how the benefits and risks of each can affect your trading strategy.

At a glance Learn the important benefits and risks of these two ways to enter orders.

Market orders and their risks
Your market order is executed at the best price obtainable at the time the order is executed. In other words, with a market order the fact that the order will be filled is all but guaranteed (subject to the availability or liquidity of the stock), but the price at which it will be filled is not.

Again, the reason for this is that the market is dynamic. Prices are changing continuously in the market as the minutes and seconds go by. Orders are executed in accordance with prescribed priority rules, delays in execution can occur due to market demand of a security, and in the meantime a market price can change as a result of investor demand and other factors. Large orders can also take longer to fill and can move the market (price and volume) for the stock, sometimes to your disadvantage.

Limit orders
In contrast to the market order, there is another type of order called a "limit order" that does guarantee the price but does not guarantee an execution. Limit orders require you to place a limit on the amount you are willing to pay to buy a stock or on the amount you are willing to accept to sell a stock. Naturally, you will accept more favorable prices if you can get them.

Here's how limit orders work using Tim Hortons as an example.

Buy limit order
THI is selling for $84 a share. Based on your experience, you think the stock could decline in the short-term and then rebound strongly upward. So you place a limit order GTC (Good Till Canceled) to buy THI at $82. (Any price different from the current market price is said to be "away from the market." Limit orders are always placed away from the market - below when you buy and above when you sell.) Now the broker/dealer's computers monitor your order and when the stock price hits $82 your buy limit order is executed, subject to the availability or the liquidity of the security, at that specific price. If the stock price does not decline to $82, your limit order is not executed.

Sell limit order
You own Tim Hortons, which is trading at $84. You think the stock can still go higher. So you place a sell limit order at $88. When the stock price rises to $88, your limit order is executed, subject to there being enough demand for the stock at your specific price. If the stock price does not rise to $88, your limit order is not executed.

Risks of limit orders
Limit orders give you more control over execution price, but control also comes with certain limitations that you should be aware of: i.e. you may miss owning or selling stock, depending on the circumstances. The stock may never reach your limit price and your limit order will not execute. For example, in the Sell Limit Order example above, if Tim Hortons only reached $87 and then started to fall, your limit order would not have executed and you'd still own the stock as its price drops.

Fail to execute: Even if your stock reaches the limit price, your limit order may not execute if there are orders ahead of yours at the same limit price. The orders in line ahead of you must be filled first and there may not be enough stock available to fill your order when its turn comes.

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