5

I am a newbie investor and have a read a few books on long term stock trading and I'm ready to execute my first trade.

I've been researching when to use limit orders vs when to use market orders and the advice seems to be: avoid using market orders unless you have an excellent reason to do so. As a newbie, I am having trouble determining the price I should set my limit order at. I tried this about a month ago and the limit order was never executed.

If I find a company that I do not consider to be over-valued, would it be appropriate to use a market order for my very first trade, or am I just being impatient?

4

Difference between a limit and market order is largely a trade-off between price certainty and timing certainty.

If you think the security is already well priced, the downside of a limit order is the price may never hit your limit and keep trading away from you. You'll either spend a lot of time amending your order or sitting around wishing you'd amended your order.

The downside of a market order is you don't know the execution price ahead of time. This is typically more of a issue with illiquid instruments where even smaller orders may have price impact. For small trades in more liquid securities your realized price will often resemble the last traded price.

Hope that helps. Both have a purpose, and the best tool for the job will depend on your circumstances.

4

If you want to make sure you pay at or below a specific price per share, use a limit order.

If you want to buy the stock close to the current price, but aren't price sensitive, use a market order.

Market orders are typically not a great idea because if you're buying thousands or tens of thousands of shares this can mean a large swing in cost if the market suddenly changes direction.

0

A few of the answers are spot on but here's another thing to consider: the type of trade.

For example, I sometimes day trade stocks with momentum where the stock price is spiking relatively fast. A limit order in this situation may never get filled and you will miss out on the trade. A market order will get you filled but you mostly likely pay more than your limit order. However you are now catching the wave up.

Overall, using a limit or market is relative to your trading style and the type of trade. I always prefer to use a limit buy order.

-1

Obvious answer but the limit order should be set at the price that you are willing to pay :). More usefully, if you want a decent chance of the order filling in short notice you should place the order one price tick above the current highest buyer (bid price).

As long as high frequency trading remains alive I would advise against ever using market orders, these algorithmic trades can occasionally severely distort the price of a security in a fraction of a second. So if your market order happens to fill in during such a distortion you might end up massively overpaying/underselling.

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