The difference between the market price and the specified price

 The difference between the market price and the specified price


Investors have two main options for placing orders to buy or sell stocks with their brokers, where they can either place a market order or a limit order. A market price order is an instruction to buy or sell shares at the prevailing market price, while a limit order price tells the broker to buy or sell a share at the price that the investor or trader specifies in his order. Choosing between these two things is essential in your investment journey. Let us now know the difference between the market price and the specified price.

In order for you to form a comprehensive and deep understanding of the difference between the market price and the specified price, we will try to provide you with an explanation of what the market price and the specified price are so that the difference becomes clear to you.
What is a buy order at market price?
A market order placed at the market price instructs the broker to buy or sell shares immediately after the order is placed. Investors use market price orders when they want to enter or exit a position immediately, regardless of the price. In contrast, a set price order instructs the broker to buy or sell a stock only if it reaches a predetermined price.
A market price order guarantees that the broker will complete the stock trade, while a limit order does not. However, a market order does not guarantee that the buy or sell will be executed at a price that satisfies the investor.
For example, after thoroughly researching a company, you might think it makes an excellent long-term investment. Since you simply want to buy and hold the stock, you are not worried about the stock’s starting price. You place a market order, and the deal is executed around the market price of the current trade. If instead you place a limit order, even using a price close to the current trading price, your order may not be executed. This can happen if the share price moves away from the price set by the limit order.
Another example of preferring to place an order at the market price over an order at the limit price is when the investor loses confidence in the company. If you want to get out of a losing position now rather than wait for a potential recovery that may never materialize, you can send an order at market price to sell all of your shares. If you were to place a limit order in this scenario, the trade may not be executed which may result in you incurring greater losses by continuing to hold the stock.
The biggest risk of using a market-price order is the fact that as an investor you have no control over the price you pay for the stock or how much money you receive from the sale. If the share price suddenly moves before you place an order in the market, you could pay much more or receive much less than you expected.
What is a buy at set price order?
While investors who place market orders do not care much about pricing, investors who prefer limit orders instruct their brokers to buy or sell a stock at a set price. A limit price order to buy is only executed when the specified price is reached or below it, while a sell order is only completed at or above the specified price.
Imagine that you as an investor have carefully researched the value of stocks that you believe are trading below their intrinsic value, which you value at $50 per share. The current market price of the stock is just under $40 per share, and to make sure you get enough value as the share price rises to make investing in the stock worthwhile, you can set a limit order at $40 per share. While you can place an order at the market price to make sure that the trade is executed immediately, setting this limit order ensures that you do not overpay if the stock price rises unexpectedly quickly. If the order is not executed, you can either set an order at a new limit price or use a market order to execute the trade.
Now imagine that you own a stock that you believe is close to its intrinsic value, which you set at $75 per share. Based on the belief that the share price will not rise above its intrinsic value, you place a limit order to sell your shares when the share price reaches $75. With the shares currently trading at around $72 per share, your limit order will only be executed if the share price is at or above $75 per share. If not, you will continue to hold your shares unless you set a new limit order or use a market order to sell your holdings.
The biggest risk of using a limit order instead of a market order is that execution may never take place. The stock price can suddenly rise or fall sharply based on a variety of factors.
The difference between placing an order at market price or limit price
Investors can use a simple test to determine whether they should use a market-price or limit-price order to buy or sell a stock. If closing a deal is extremely important to you, then ordering at market price would be your best option. But if getting a specific price when buying or selling a stock is a limiting factor, then a limit order is the better order type. Your preference can change over time, even for the same stock. You may initially set a limit order to buy a share at an attractive price, and if this order is not executed, you may decide to cancel the limit order and place a market order instead.
Deciding what type of order to use can seem like a daunting task to a novice investor. Therefore, you must be careful in choosing among these orders and determining which one is best for you according to your goals and budget.
Disclaimer: The content of this article is for informational purposes only. The information provided should absolutely not be considered as investment advice or a recommendation. No warranty is made, express or implied, as to the accuracy of the information or data contained herein. Users of this article agree that Money Secrets does not accept responsibility for any of their investment decisions. Not every investment or trading strategy is suitable for anyone. See the risk warning statement.