Investing How to: Limit Order vs Market Order

*This post “Investing How to: Limit order vs Market Order” may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

Limit Order vs Market Order Definition

A market order is designed to fill as quickly as possible. You agree to purchase a set number of shares (or dollar value) at the market value at the time. The order will be executed as long as there are enough shares to fill the order before the share price changes.

A limit order is when you set the price you would like to purchase shares at. The order is only executed if the share price reaches the limit order you have set.

How to Investing – Which Type of Order?

Have you recently started the plunge and started investing? Or still trying to work out the finance jargon before you take that leap? Market and limit orders are terminology you will come across when placing a trade (buying any share or ETF) on your broker’s platform.

The thing to remember is your overall investing style. Many readers will have a plan to continue dollar-cost averaging into the stock market on a regular basis, no matter what the market is doing. Remaining disciplined and following your strategy over the long term with dollar-cost averaging is a no-hassle way to get rich slow.

The biggest risk to your investment returns is your human nature. When the market drops, as it did just weeks ago, it becomes increasingly difficult to ignore the media doom spreaders and keep buying. Our brains prioritize short-term thinking.

Limit Order vs Market Order vs Dollar Cost Averaging

For those wanting to dollar cost average over the long-term, I am a strong advocate of automation.

Set up a direct debit into your investment of choice and avoid 90% of temptations to not carry through your plan. If you automatically invest no matter what the market is doing, you don’t need to know about market or limit orders.

Your automated investment will go through as scheduled as a market order no matter the market price at the time.

When the market is down, you will purchase more shares for your regular investment cash. There is no need to try and predict market movements (which seems impossible).

Options to automatically invest on a regular basis include using a micro-investment app (ideal if investing parcels <$1000), investing in a Vanguard diversified managed fund through Vanguard personal investor (quick start minimal research needed), or selecting your ETFs yourself and auto-investing with an online broker.

Micro-investment apps and VPI really suit beginner investors who just want to get started and are not interested/not ready to choose their own investments.

I have accounts with Pearler and Commsec so am in a position to step by step through market or limit orders with either.

Market Orders

As mentioned above, a market order is filled almost instantly (as long as there are enough shares available for sale at the market price at the time).

This is the traditional way to invest in the stock market before auto-investing was a thing. Many investors will still use market orders to invest at preset intervals, according to their investment plan.

It also may be how you would invest if you had come into an unexpected lump sum of cash. Statistically, you will be better off putting the entire lump sum into the market at once, rather than dollar-cost averaging. You do have to be able to stomach the volatility though, and admittedly this is much harder shortly after investing a large sum.

Market Orders with Pearler

Pearler specializes in auto-investing, but you can easily perform a one-off market order as well. Below is a screenshot of my Pearler platform.

You can type the ticker code into the search button at the top, or navigate to the “Invest” tab to choose from a selection of popular investments.

After selecting your chosen investment, the next screen displays the current market price and a graph of historical performance. The “buy” button is pretty obvious.

After selecting “buy” you are taken to the order screen.

Here you are again prompted with the market price and can enter how much you would like to buy.

Auto-deposit automatically debits the money from your linked bank account if there is not enough left in your money market account, but Pay ID allows immediate (particularly if not the 1st transaction) movement of money.

Brokerage is $6.50 with Pearler (unlimited amount) although this is planned to reduce shortly. Pearler brokerage can also be discounted down to $5.50 by paying for credits in advance. Feel free to check out my full Pearler review.

Market Orders with Commsec

Commsec remains the most commonly used online broker in Australia. It is more expensive than Pearler and other modern online brokerage platforms. But many investors stick with what they know and trust, and the longstanding reputation of Commsec keeps some investors loyal.

Again, the platform is pretty easy to navigate. There is a search button at the top of the site where you can enter your ticker code for the relevant investment.

Next, you are taken to a page displaying investment data and an obvious “buy” or “sell” option.

After pressing “buy” you are taken to an order page where you can enter how much you would like to invest today. If you want to purchase at the current price (market order) tick the “At market” box.

Once you have submitted this form, you get to confirm all the details on the next page before finalizing the order. On my first orders, I was worried about making a mistake but it’s all pretty simple as long as you check and double-check each detail.

Commsec brokerage is $10 for up to $1000, $19.95 for $1-10,000 and $29.95 for $10,000-$25,000 as long as you settle using their CDIA account.

Commsec offers T+2 trades, meaning you can purchase shares at the moment, and just have to have the funds cleared in your CDIA account (set up when you open a trading account with Commsec) 48 hours later.

Limit Orders vs Market Orders – Limit Orders

Limit orders mean you do not buy the investment immediately. Instead, you set the price at which you would like to buy and if the share price drops to that limit while your limit order is active, the order is confirmed and investments purchased.

There is a good chance that your limit order will never be fulfilled. If the share price goes up, or dips but not quite as low as your limit order the order will not go through. When there are inadequate shares for sale when the price dips to your limit, it will be partially fulfilled.

If you were relying on limit orders as your normal mode of buying, it is likely that you won’t end up investing as much. The stock market, after all, tends to go up over the long term. If you wait for market dips to invest, you are likely to end up worse off overall than dollar-cost averaging as you will have less time invested in the market.

Limit orders can be useful if you are interested in buying at a discount when the market dips, on top of your regular dollar cost investments. The argument still stands though that if you were going to invest this money, you should have done so as soon as possible to attain the highest profit.

However, I still “buy the dip” when the opportunity arises.

  • I dollar cost average every fortnight into Pearler, and superannuation
  • More savings are aimed at paying off my PPOR mortgage. At 2.6% this is likely to be inferior to stock market returns but provides more freedom (and I am so close I want the debt gone!)
  • When the market corrects 10+% I know eventually it will rebound, it is likely I will make outsized returns when this occurs.
  • The opportunity cost of paying down our mortgage instead of investing in the stock market becomes far greater.
  • I also feel more in control of the situation when the market is dropping by “doing something” that feels useful, I am less likely to panic and sell.

As a result, I have a very simple strategy of investing a set amount at set percentage drops from the high. I don’t monitor the market closely but find I can’t avoid hearing that the market is “crashing” so then set up limit orders to be fulfilled at my predetermined drops in value.

Limit Orders with Pearler

Pearler does offer limit orders. On the purchase page, you simply press “more options to find the limit order option. Pearler limit orders remain active until they are executed, or you cancel them (unlike Commsec below).

I tried this during a recent downturn. I simply used auto-deposit, but of course, by the time the money had cleared into my Pearler trust account, the price had rebounded.

Then the cash was stuck in my trust account earning next to no interest, instead of my offset earning a still unimpressive 2.6%.

Given I would prefer to work on fully offsetting my mortgage unless the market does a significant enough dip, this didn’t really suit me.

I made my 1st withdrawal from Pearler as a result. For those interested in Pearler, I had to provide a little further identification before making the 1st withdrawal and this took a couple of days to process. The money landed bank in my offset as expected after that.

Limit Order with Commsec

This is why I still have my account with Commsec. I can set up a limit order and the money only moves if the trade goes through, allowing my cash to keep saving me the interest in the meantime.

To make a limit order with Commsec, you go through exactly the same process but type the price you would like to purchase at in the “Price limit” box instead of ticking “at market”.

You are then taken to the confirmation page where you can check all the details and submit the order. With Pearler the limit order is active for 1 month, so you will need to keep resetting it if you want to.

When the trade is activated, you will receive an email with this information. You then have 48 hours to get money transferred to your settlement account or risk a fine.

Obviously, you will need to monitor your emails if you have limit orders set up and be ready to transfer the cash quickly. You must be confident your cash will clear in time before the settlement date.

Limit order vs Market order

Market orders are the traditional way to buy stocks. You simply log in and buy at the current price when it suits. But wealth is not often built through one-off or Adhoc investments. Most of us need consistent, regular investing over the long term to build significant wealth. Auto-investing makes this easier to stick to.

Limit orders won’t appeal to many new investors. If you have money that you want to put in the market, most of the time you will profit more by putting in as a lump sum immediately. But if, like me, you have a competing use for your investment, setting up a limit order may suit you.

A limit order means if you want to buy at a specific price you don’t have to spend your days obsessing over market prices (trying to catch the dip).

If you’re happy to watch the market and purchase opportunistically, a market order through a low-cost broker will be more cost-efficient.

Let me know which strategy you prefer – Autoinvest, market, or limit orders. Comment below to learn from each others perspectives.

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Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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