Market orders vs limit orders, when do you use each?

Question

A stock is quoted 99.98 bid, 100.02 offered. You want to buy. What is the difference between sending a market order and resting a limit order at the bid, and what are you trading off between them?

Accepted Answer

A market order demands liquidity: you buy at the ask, 100.02, immediately. Relative to the mid (100.00), you pay the half-spread of 2 cents as the price of certainty. A limit order at 99.98 supplies liquidity: if someone sells to you, you buy 4 cents cheaper than the market order. But you take two risks: - Execution risk. If the stock rallies, your bid never fills and you miss the trade entirely, often exactly when you most wanted to own it. - Adverse selection. Your bid fills most readily when the market is trading down through your price. Conditional on being filled, the stock is more likel…

Market orders vs limit orders, when do you use each?

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