Market order vs limit order, with a worked order book

What is the difference between a market order and a limit order?

A market order buys or sells right away at the prices available now. A limit order buys or sells only at a price you set, or better, and waits if that price is not available.

Put simply, a market order fixes whether you trade but not the price. A limit order fixes the price but not whether you trade. You cannot have both fixed at once.

• Market order: "Buy 100 shares now, at whatever the sellers are asking." Fast, but the price can be worse than the last price you saw.
• Limit order: "Buy 100 shares, but pay no more than Rs 251." You never pay more than your limit, but the order may wait, fill partly or not fill at all.

To see how orders reach the exchange and settle, read how the stock market works.

Worked example: the ABC Limited order book

The order book lists waiting buyers and sellers at each price. A market order takes the cheapest waiting sell orders first and keeps going up until it is filled, so a large order can fill at several prices.

Here is ABC Limited's order book at 11:00 IST on a trading day. All numbers are made up. The last trade was at Rs 250.80.

Order A: market buy, 100 shares. It takes the cheapest sellers first.

• 40 shares at Rs 251.00 = Rs 10,040.
• The next 60 shares at Rs 251.50 = Rs 15,090.
• Total: Rs 10,040 + Rs 15,090 = Rs 25,130 for 100 shares, an average of Rs 251.30 per share.

The screen showed Rs 250.80, but the buyer paid an average of Rs 251.30. Nothing went wrong. That is how a market order works.

Order B: limit buy, 100 shares at Rs 251.00. Only 40 shares are available at Rs 251.00 or less. So 40 fill at Rs 251.00 (Rs 10,040). The other 60 wait in the book as a new bid at Rs 251.00, ahead of the Rs 250.50 buyers. They fill only if a seller later comes down to Rs 251.00.

Order C: limit buy, 100 shares at Rs 250.00. No seller is asking that little, so nothing fills. The order joins the queue of buyers at Rs 250.00, behind the 150 shares already waiting there.

Order D: limit buy, 100 shares at Rs 252.00. The limit is a maximum, not a fixed price. This order fills exactly like Order A, at Rs 251.00 and Rs 251.50, for Rs 25,130. It does not pay Rs 252.00.

What are stop-loss and stop-loss market orders?

A stop-loss order waits silently until the price reaches a trigger price you choose, and only then becomes a live order. A stop-loss limit (SL) order becomes a limit order, and a stop-loss market (SL-M) order becomes a market order.

Stop-loss orders are mostly used to limit the damage if a price moves against you. Suppose Kavya, a made-up learner, holds 10 ABC shares bought at Rs 250. She decides she does not want to keep them if the price falls to Rs 240.

• SL order: trigger Rs 240, limit Rs 238. When a trade happens at Rs 240 or lower, her order becomes a limit sell at Rs 238. It sells at Rs 238 or higher, if buyers are there.
• SL-M order: trigger Rs 240. When the trigger is hit, it becomes a market sell and takes whatever buyers are bidding.

The difference shows up when the price jumps past the trigger. Say ABC closes at Rs 245 and opens next morning at Rs 232 after bad news. The SL order triggers, but its Rs 238 limit is above every bid, so it does not sell and Kavya still holds the shares at Rs 232. An SL-M order would sell at around Rs 232. Her loss would then be about (Rs 250 minus Rs 232) x 10 = Rs 180, plus charges, more than the Rs 100 she planned for at Rs 240.

A stop-loss is a tool, not a shield. It cannot promise the price you choose. Also note that not every broker offers every order type in every segment, so check your broker's order screen.

What is an after-market order (AMO)?

An after-market order is an order you place when the market is closed. Your broker holds it and sends it to the exchange when trading opens. The exchange only sees it then.

The normal equity trading session runs from 9:15 to 15:30 IST on trading days, with a short pre-open session just before 9:15. If you place an order at 21:00 on Monday, your broker keeps it as an AMO and sends it to the exchange on Tuesday morning.

Two things to remember:

• AMO is a broker facility, so the exact hours for placing and sending AMOs depend on your broker.
• Prices can open well above or below the previous close. A market AMO placed at night could fill at a very different price from the one you saw in the evening. A limit AMO protects you from paying more than your limit.

Delivery vs intraday: what is the difference?

A delivery trade means you buy shares to hold, and they are settled into your demat account on T+1. An intraday trade means you buy and sell, or sell and buy back, the same share on the same day, so no shares reach your demat account.

When you place an order, the app asks you to pick a product. The names vary by broker, but the idea is the same:

• Delivery (also called CNC at some brokers): you pay the full amount. If you buy 10 ABC at Rs 250, Rs 2,500 plus charges is used, and the shares arrive in your demat account on T+1. You can hold them as long as you like.
• Intraday (MIS at some brokers): you must close the position before the market closes. If you do not, the broker closes it for you near the end of the day at the price then available. Brokers may let you trade intraday with only part of the money as margin, which also makes losses larger compared with the money you put in.

Intraday trading needs close attention through the day and can lead to losses quickly. Beginners should understand it fully before trying it, and it is fine to decide not to trade intraday at all.

How long does an order stay alive? DAY and IOC

A DAY order stays in the order book until it fills, you cancel it, or the trading day ends. An IOC (immediate or cancel) order fills whatever it can the moment it arrives and cancels the rest at once.

Take Order B from the ABC example: limit buy 100 at Rs 251.00, with only 40 shares available at that price.

• As a DAY order: 40 fill now. The other 60 wait at Rs 251.00 for the rest of the day. If they never fill, they are cancelled after the close.
• As an IOC order: 40 fill now. The other 60 are cancelled immediately. Nothing is left waiting.

Some brokers also offer orders that last for days or weeks under their own names. These are generally broker features: the broker holds your instruction and places a normal order on the exchange when your condition is met.

Why is a market order risky in a thinly traded share?

In a share that trades rarely, there may be only a few sellers, at prices far apart. A market order will walk up through them and can fill far above the last traded price.

"Thinly traded" means few shares change hands and the order book has big gaps. Here is the made-up order book of XYZ Foods, last traded at Rs 80.00:

A market buy for 50 shares fills like this:

• 10 at Rs 80.00 = Rs 800.
• 15 at Rs 84.00 = Rs 1,260.
• 25 at Rs 95.00 = Rs 2,375.
• Total Rs 4,435 for 50 shares, an average of Rs 88.70.

That average is Rs 8.70 above the last price, about 10.9% higher (8.70 divided by 80). Selling straight back would bring even less, since the highest bid is only Rs 76. A limit order at, say, Rs 81 would have bought just 10 shares at Rs 80 and waited for the rest. Exchanges do apply price bands on many shares, which limit how far a price can move in a day, but within the band a market order in a thin share can still be costly.

Common mix-ups

Order types are easy to confuse because the app screens look similar. Here are five common mix-ups, each corrected.

1. "A limit order buys at exactly my limit price." It buys at your limit or better. Order D above set Rs 252 and paid Rs 251 and Rs 251.50.
2. "A market order buys at the price on my screen." It buys at the prices sellers are asking when it arrives, which can be higher, especially for large orders or thin shares.
3. "A stop-loss means I cannot lose more than I planned." If the price jumps past your trigger, an SL order may not fill and an SL-M order may fill at a worse price.
4. "An AMO is placed on the exchange at night." The broker holds it and sends it when the market opens.
5. "Intraday shares come to my demat account." They do not. Intraday positions are closed the same day, so nothing is delivered.

Look up any unfamiliar word in the stock market terms glossary.

Check yourself

Three quick questions on the ABC Limited order book above. The answers are right below each question.

1. A market buy for 40 ABC shares arrives. What does it pay in total?
   Answer: 40 x Rs 251.00 = Rs 10,040. All 40 come from the first seller.
2. A limit buy for 50 ABC shares at Rs 251.00 arrives as an IOC order. What happens?
   Answer: 40 fill at Rs 251.00 and the other 10 are cancelled at once.
3. You hold ABC with an SL-M sell, trigger Rs 240. The price opens at Rs 232. Roughly where do you sell?
   Answer: at around Rs 232, the prices buyers are bidding, not at Rs 240.

New to the whole idea of shares? Begin with stock market basics for beginners and demat account explained.

Where to check this yourself

The exchanges explain their order types and trading hours on their own websites, and SEBI's investor website covers the basics for beginners.

• SEBI, the market regulator
• SEBI's investor education website
• National Stock Exchange (NSE)
• BSE
• NSDL, a depository
• CDSL, a depository