Market Orders, Limit Orders and Bid-Ask Spreads

The quoted price is not always the executable price

Markets commonly show a bid, the price buyers are offering, and an ask, the price sellers are requesting. The gap is the bid-ask spread. A displayed last-traded price can differ from both.

Market orders prioritise execution

A market order generally seeks immediate execution at available prices, but it does not guarantee the exact price shown before submission. In fast or illiquid markets, the executed price can move materially.

Limit orders prioritise price

A limit order specifies a maximum purchase price or minimum sale price. It can protect against an unacceptable execution price, but it may not execute at all if the market never reaches the limit or available volume is insufficient.

Liquidity affects costs

Wider spreads and shallow order books can increase trading cost. Frequent trading magnifies these frictions. Long-term investors should include execution costs alongside fund fees and taxes when comparing strategies.

Quality check before placing a trade

Separate the instruction type from the expected investment return. A market order prioritises execution, while a limit order places a boundary on price but may not execute. Check the quoted spread, trading volume and market conditions for the security being traded, especially when the instrument is thinly traded or the market is moving quickly.