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Market orders and limit orders

The difference between trading at the current quote and naming a price, why a limit order may not fill, and how a stop order becomes a market order.

Market orders and limit orders

The SEC's trade-execution publication uses a market order as its working example: an order to sell 500 shares, compared with the current quote. A market order is meant to be filled promptly at whatever prices are available, so the fill can be better or worse than the quote on the screen, especially when prices are moving quickly or when the order is larger than the size of the quoted bid or offer. The same publication notes that no SEC rule requires a trade to be executed within a set period of time.

An SEC Fast Answer on limit orders defines a limit order as an order to buy or sell a stock at a specific price or better. A buy limit can be executed only at the limit price or lower; a sell limit only at the limit price or higher. The page is explicit that a limit order is not certain to be executed, because it can be filled only if the stock's market price reaches the limit price. That is the trade-off: control over the worst price, with the chance that the order just sits there.

Stop orders

A related instruction is the stop order. The SEC's Fast Answer on stop orders says a stop order, also called a stop-loss order, becomes a market order once the stock reaches a specified stop price. A sell stop is entered at a stop price below the current market price; a buy stop is entered above it. Because the order becomes a market order at the trigger, the eventual fill can be some distance from the stop price if the quote has already moved.

• A market order seeks a prompt fill at the current available prices.
• A limit order sets a worst acceptable price and may not fill.
• A stop order is a trigger: once the stop price is reached, it is handled as a market order.

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