When entering the stock market with a low brokerage trading account, understanding the different order types is essential for making cost-effective decisions. Two of the most common order types are Market Orders and Limit Orders. Knowing how to use these on Bajaj Broking’s platform can help you maximise your returns while keeping low brokerage charges. Let’s break the differences between the two order types using Bajaj Broking as a practical example.
What is a Market Order?
A Market Order is the simplest type of order. When you place a market order, you are guiding your broker to buy or sell a stock immediately at the best available current price. This type of order guarantees that your order will be executed. However, it does not guarantee the price at which it will be executed.
Let’s say you want to buy shares of Reliance Industries. You notice that the current market price is ₹2,500 per share. If you place a market order through your Bajaj Broking app, your order will be executed at the best available price, which could be slightly higher or lower than (or very close to) ₹2,500, depending on market fluctuations at that moment. Bajaj Broking’s real time data and quick execution tools ensure that your order is processed without any delay.
Advantages of Market Orders
- Immediate Execution: Market orders are executed quickly. This is beneficial when you want to enter or exit a position without delay.
- Simplicity: They are very easy to use and study. This makes them a popular choice for beginners.
Disadvantages of Market Orders
- Price Uncertainty: The execution price can vary. You might end up paying more than expected. Avoid market order when a trade is being executed in a less liquid asset.
- Slippage Risk: In volatile markets, the price at which your order is executed may differ from the price you saw when placing the order. This can be undesirable.
What is a Limit Order?
A Limit Order allows you to set a specific price at which you want to buy or sell a stock. Your order will only be executed at that price or better. This means you have more control over the price at which your order is executed. However, it does not guarantee that your order will be executed if the market price does not reach your limit price.
Suppose you want to buy shares of Infosys via Bajaj Broking app. However, you believe that the current market price of ₹1,200 is too high. You decide to place a limit order at ₹1,150 on the Bajaj Broking app. Consequently, if the stock’s price drops to ₹1,150 or lower, the order will be executed. If the market price does not reach ₹1,150, your order will not be executed and lapse. Bajaj Broking’s price alert tools can notify you when the stock approaches your target, thereby relieving you from the hassle of constant market monitoring.
Advantages of Limit Orders
- Price Control: Because you can specify the exact price at which you want to buy or sell, you can better manage your trading strategy.
- Protection from Market Volatility: Limit orders protect you from buying or selling at unfavorable prices during market fluctuations. You can trade a high number of shares with a high bid-ask spread.
Disadvantages of Limit Orders
- Execution Risk: There is no guarantee that your order will be executed. If the market price doesn’t reach your limit, you might miss the opportunity entirely.
- Partial Fills: If you place a large limit order, it might only be partially filled if the stock price hits your limit. This means you may not get the full quantity you wanted.
When to Use Each Order Type?
Here’s when to use both:
Market Orders
- You want to make a quick trade with immediate entry and exit.
- You are buying or selling highly liquid stocks, with narrow bid-ask spreads.
- Price fluctuations are less of a concern.
Limit Orders
- You have a specific price in mind for your trade and are trading a large number of shares.
- You are trading less liquid stocks with a high bid-ask spread.
- You want to set a target price for taking profits or minimising losses.
Wrap Up
Choosing between market and limit orders entirely depends on your trading goals and the nature of the market. Nevertheless, understanding the difference between market and limit orders is important for any trader. In short, market orders offer quick execution but come with price uncertainty, while limit orders provide price control at the cost of execution risk.
With Bajaj Broking’s low brokerage trading app and account features, you can make smarter, more cost-effective and targeted trades that align with your investment goals.
Read Also: How to Monitor Your Investments Using a Demat Account