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 got filled when the price dropped to $794.01, resulting in a small unrealized gain at the market close. However, the limit buy order at $793 did not execute, resulting in neither a gain nor loss. If the trader used a market order at the start of the day, they would likely have purchased the GOOG share at around $797.40 and ended the day with a small loss.