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It's important to understand clearly the spread, and its effect on your potential profit. |
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The good news is that there are ways to get around this rule of always buying on the ask and selling on the bid, and thus "giving up" the spread. |
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If you want to buy or sell a security, you need to know about the different kinds of orders you can give to your broker. |
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A market order is an instruction to your broker that you want to buy or sell at the best price that can be obtained at the current time. Market orders are given execution priority over other types of orders. |
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This sounds just fine, doesn't it? |
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The problem is that, the minute you issue a market order, you have lost control. You don't know what price you are going to get; it could be very far from the price you wanted. |
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Imagine what would happen to your market order in a very busy market when delays may be 5, 10, or even 20 minutes. There is no way of telling what that price might be. |
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Or imagine you placed a market order just before the market opens and the price for your stock opens six points higher than yesterday's close (called a "gap up"). You would be executed at a price very far from the one you had in mind. |
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On second thought, don't imagineyou will get depressed! As a rule, experienced traders don't use market orders very often; they set limits on their prices. |
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A limit order does just what it says, it sets an upper limit on the price you are willing to pay to buy a stock, or it sets a lower limit on the price you are willing to accept to sell a stock. If your order is executed, you will receive either the limit price or a better price. You cannot receive a worse price. |
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