Market Orders vs. Limit Orders

Market orders obtain the best price being offered in the market, so traders submitting marker orders are simply taking the market price. Limit orders will only buy below or sell above a given price. Suppose a trader’s limit order specifies a price between the bid and offer prices. In that case, that trader is considered to make the market as other market participants may accept the better price being offered.

Question

$$
\begin{array}{l|r}
\text{Alphabet Inc. (GOOG)} & \text{December 14, 2016} \\
\hline
\text{Open} & $797.40 \\
\text{High} & $804.00 \\
\text{Low} & $794.01 \\
\text{Close} & $797.07 \\
\end{array}
$$

If a trader had submitted a buy order for a single GOOG share at market open, what order would most likely result in the best one-day return?

1. Market order.
2. Limit order at $793.
3. Limit order at $795.

Solution

The correct answer is C.

The limit buy order at $795 would be filled as the price dropped to a $794.01 low, and the trader would have a small unrealized gain at market close, but the limit buy order at $793 would not be executed and thus result in neither a gain nor loss as no transaction would take place. At the beginning of the day, the market order would likely result in a purchase of the GOOG share at about $797.40, and the trader would end the day with a small loss.