Market Order vs. Limit Order: A Guide for Long-Term Investors
When you're ready to dive into the world of investing, one of the first decisions you'll have to make is how to go about buying stocks. There are two main types of orders that investors can place when buying stocks: market orders and limit orders. But which one is right for you and your investment goals? Let's break it down.
Market Orders: Buying at the Current Price
Think of a market order like going to the grocery store and buying a carton of milk. You pay whatever the price is at that moment. When you place a market order to buy a stock, you're saying, "I want to buy this stock right now at whatever price it's currently being sold for."
Market orders are all about speed. They're a good choice when you want to make sure you get the stock as quickly as possible. For example, if you've done your research and decided that a particular stock is a good investment, a market order allows you to buy it immediately.
However, the trade-off for that speed is control over the price. The stock market price can change rapidly, and the price you end up paying might be higher than what you saw when you decided to buy. This is especially true in volatile markets where prices can fluctuate wildly from one moment to the next.
Limit Orders: Setting a Maximum Price
Now, imagine you're at an auction and you decide the highest price you're willing to pay for a painting. That's like placing a limit order. When you place a limit order to buy a stock, you're saying, "I want to buy this stock, but only if I can get it for this price or lower."
Limit orders give you control over the price. They're a good choice when you want to make sure you don't pay more than a certain amount for a stock. For instance, if you've done your research and decided that a particular stock is a good investment but only at a certain price, a limit order allows you to set that maximum price.
The trade-off for that control over the price is speed. A limit order will only be executed if the stock's price falls to your set limit or lower. This means it might take longer for your order to be filled, or it might not get filled at all if the stock's price never drops to your limit.
Which One Is Right for You?
Deciding between a market order and a limit order depends on your individual goals and risk tolerance.
If you're a long-term investor who's more concerned with building a portfolio of solid stocks than with getting the absolute lowest price, a market order might be right for you. It allows you to buy the stocks you want quickly, so you can start reaping the potential benefits of ownership sooner.
On the other hand, if you're a more price-conscious investor who's willing to wait for a good deal, a limit order might be a better fit. It allows you to control the price you pay for a stock, which can help you avoid overpaying in a volatile market.
When you're a long-term investor with a focus on buying high-quality assets, the exact purchase price may not be as important as acquiring the asset itself. Over the long run, a great company will likely see its stock price rise, and the few pennies or dollars you could save with a limit order might not make a significant difference in your overall return.
In this context, market orders can be a convenient choice. They ensure you acquire the asset quickly, allowing you to hold onto it for the long haul. While price is certainly a consideration in any investment, the value of owning a piece of a fantastic company often outweighs the benefit of waiting for a slightly lower price.
For this reason, many long-term investors, myself included, tend to favor market orders. They allow us to focus on the bigger picture - buying and holding great assets for the long term - rather than trying to save a few pennies or dollars in the short term.
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I recently put together a master list of 100 different ETFs designed to support different investment goals. You can grab it here.
And as always: Stack assets & enjoy life.
-Josh
Blog Post: #126
