The investments industry, like most professions, has its own jargon. Although certain investment terms might sound similar, they can have very different meanings. When it comes to placing a buy order, you have several choices. You can place a market order or a limit order. Placing the right type of buy order helps ensure that you get the stock you want at a price you can live with.
How the Market Works
The stock market is a double-auction market through which buyers and sellers meet, usually electronically, to trade stocks. Each stock listed on a particular exchange typically has two prices: a bid and an ask price. The bid price is the highest price being offered to purchase the stock, and the ask price is the lowest price at which the stock is being offered for sale. When the bid and ask prices match, a trade is made.
If you want to make sure your order will be completed, or executed, your best bet is to enter a market order. A market order, sometimes referred to as an at-the-market order, tells your broker to buy the stock at the best price available. In most cases this means the trade will take place at the ask price, but there are exceptions. In a fast-moving market, the price of the stock you want to buy might be rising rapidly. Market orders are executed in the order they are received. Demand might drive the price of the stock much higher, and you might end up paying considerably more than you expected to.
A buy limit order sets the top price you are willing to pay for a share of stock. It tells your broker to buy the stock at the best price available, but not to exceed a specific amount. If no ask price is available at or below your limit price, the order will not be executed and no trade will be made. If the market price for the stock is less than your limit price, the order will go through at the lower price. For example, if you place a buy limit order for XYZ stock at $45, and the stock has an ask price of $47, your order will not be executed. If the stock has an ask price of $41, your purchase will be made at $41.
If you want to buy shares of a particular stock and you enter a buy limit order, your order might not be executed at all. In a fast-moving market you might end up chasing the stock and paying a higher price than if you had entered a market order. Depending on your broker, your buy limit order might be filled at different prices. For example, if you place a buy limit order for 500 shares of XYZ at $45, your broker will fill the order at the best price available at or below $45. Your order might be filled with 200 shares at $42, 100 shares at $44 and another 200 shares at $45.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.