Market order versus limit order: the basics

Most investors buy or sell shares in one of two ways - with a market order or a limit order.

These order types are commonly used when trading listed investments, such as shares, exchange-traded funds and investment trusts.

Both are different ways of telling your investment provider how you want your trade to be carried out. However, one focuses on speed, while the other focuses on price control.

Understanding how they both work, and the differences between them, can help you choose an approach that suits your situation.

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What is a market order?

A market order tells your investment platform or broker to buy or sell an investment as soon as possible at the price available when the order is executed.  When you place a market order, your investment platform or broker must take reasonable steps to get the best possible result for you, in line with their best execution policy.

A market order focuses on getting the trade done quickly rather than giving you certainty over the final price. With an immediate market order, you can place the order at any time, but because prices move constantly during the trading day, the price you receive may be slightly different from the one you saw on screen. Some platforms may also offer a “quote and deal” option during market hours, where you can see and accept a quoted price before you trade. 

For widely traded investments, this difference is often small. But during periods of market volatility, prices can move quickly.

Think of it like this:

• Imagine shares in a company are trading at around £50.
• You place a market order to buy immediately. By the time the order is processed, the price may have moved slightly higher or lower.
• Your trade will usually still go through, but not necessarily at exactly £50.

What is a limit order?

A limit order lets you set the maximum price you’re willing to pay when buying, or the minimum price you’re willing to accept when selling. The trade will only happen if the market reaches your chosen price.

A limit order gives you more control over pricing. It lets you set the price you’re willing to pay or accept, so you don’t need to watch the markets constantly or worry about quick price swings. 

However, there’s no guarantee the trade will happen. If the market never reaches your chosen price, the order may remain unfilled or expire.

Depending on your investment platform or broker, the full order may need to be completed at your chosen price. If the full amount is not available at that price before the market closes, the order may be cancelled. And you may need to place a new order if you still want to trade on the next business day.

Fidelity treats limit orders in this way, so the full order must be completed at your chosen price or it will not go through.

Think of it like this:

• Imagine a share is currently trading at £50, but you only want to buy if the price falls to £45.
• You can place a limit order at £45. Your provider will only complete the trade if the market reaches that level.
• If the share price never falls to £45, the order won’t go through.

What are the main differences?

The biggest difference is certainty.

A market order is designed to be executed quickly, but the exact price may change. A limit order gives you control over the price, but the trade may never happen.

A market order may suit investors who:

• want to buy or sell quickly
• are investing in widely traded shares or funds
• are comfortable with small price movements during the trade
• trade investments with high liquidity

A limit order may suit investors who:

• want more control over the price they pay or receive
• are trading during volatile market conditions
• are willing to wait for a specific price
• want to avoid making emotional decisions during sudden market movements

It’s also worth knowing that, depending on your investment platform, you may pay a dealing fee when placing a trade. This fee usually applies whether you use a market order or a limit order, although charges can vary between providers.

What are the risks?

With a market order, the main risk is price movement. The market price could change before the trade is completed, meaning you may pay more or receive less than expected.

With a limit order, the main risk is that the trade may never happen. If the market doesn’t reach your chosen price, the order will remain unfilled.

Liquidity can also affect both order types. Liquidity refers to how easily buyers and sellers can trade an investment without significantly affecting the price. Investments with fewer buyers and sellers may experience wider price changes or slower trade execution.

Which order type could be right for you?

Neither order type is necessarily better. The decision comes down to what matters more to you. Both have their benefits and drawbacks.

If speed and a higher likelihood of execution are your priority, a market order may be more suitable. But if controlling the price matters more, a limit order may be worth considering.

Before placing any trade, it's important to understand how the order type works and whether it fits your investment objectives and risk tolerance.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.