Whenever we talk about the share market, we talk about buying and selling of shares, but it’s important to understand what type of order we’re placing every time we buy a share.
Yes you got it right, there are many different options of purchasing a share. Two of the most common types of orders are Market Order and Limit Order.
Before diving into Market Order and Limit Order, let’s recall our basics right on how the market works. Say, you wish to purchase a pair of shoes. You would pay some money to the seller and the seller would deliver the shoes to you. Once this is done, the order is considered complete. Now, in the share market, instead of shoes, the transaction here is of shares. You pay money to buy shares and the seller receives money to sell shares.
It is important to keep in mind that the share market is extremely volatile and the prices fluctuate within milliseconds. Let’s assume that the the price of an asset A is Rs 100, in no time the price can change to Rs 101, Rs 102, Rs 99 or Rs 98.
Going back to our topic of Market order and Limit order. Market order requires you to specify only the quantity of shares that you wish to buy, and the transaction takes place almost instantly. However, in the case of Limit order, you specify both your desired quantity of shares as well as the price you wish to buy it at. Your transaction takes place when the market price reaches your specified price.
To understand this better, let’s imagine you wish to buy a share- say share A. In the case of Market order, you say that you want to buy 20 quantities of share A. Your order then goes to the stock exchange, and whenever a seller is ready to sell Share A (irrespective of the market price), the transaction takes place.
In this situation it’s highly possible that the price was Rs 100 when you placed the order, but by the time the order got executed, the price became Rs 102. The risk associated with Market order is that you get to know what price your order got executed at only afterwards, and there’s no guarantee that the buying or selling will take place at the price that you’re seeing.
In the case of Limit order, you would say that you want to buy 20 quantities of Share A, when the market price is Rs 90. Your order will get placed at the exchange, but until the price doesn’t reach Rs 90, the order will not get executed.
In case of limit order, the benefit you get is that the price is fixed, so there’s no chance that you’ll get your order at a higher price than expected. And since, limit order always gets executed at the best price, you might even get to buy the stocks at a price lesser than the one you quoted; ie. Rs 80. But the drawback here is that it’s possible that the prices never come down to Rs 90, and even if it does, there might be a lot of investors hoping to buy at the same price, and as orders are served on a first come first serve basis, it’s pretty much possible that your order wouldn’t get executed at all.
Generally it is said that placing a limit order is more beneficial than market order, because here you know the price and in case there is a lot of volatility, in a fraction of second, then you won’t face any losses. Placing a Market order is more suited when the aim is to buy or sell shares quickly, or for individuals who are looking to invest for the long term and are not bothered by short term market fluctuations. On the other hand, Limit orders make sense when an investor wants to take advantage of a volatile market and hence are more suited to traders looking to book gains in the short term. Regardless of what you choose, understanding of the inherent risks and workings of the share market is important before making any transactions