Order book, market, and limit orders: how is a share actually bought?
You clicked “Buy” in your investment app. What happens now?
- Reading time
- 8 minutes
- Complexity
- Intermediate
- Last updated
It is easy to imagine that we simply buy the share directly from the stock exchange, like taking a product from a supermarket shelf at a fixed price. In practice, an exchange is not a shop, and a share does not have a fixed price tag. For a trade to take place, interests must meet: someone who wants to buy and someone who is willing to sell must agree on the same price.
To understand how the next price is determined, we need to look behind the scenes—at the order book.
What is an order book?
The order book is the exchange’s digital noticeboard. It is where all investors’ buy and sell orders wait until they find a counterparty. The book always has two sides:
- Buyers—demand or bid: They offer prices and wait for someone to come down to them.
- Sellers—supply or ask: They request prices and wait for someone to come up to them.
Suppose the order book for a particular share currently looks like this:
Example of an order book
| Buyers (bid) | Sellers (ask) |
|---|---|
| Investor A is willing to buy at ₪100 | Investor C is willing to sell at ₪101 |
| Investor B is willing to buy at ₪99 | Investor D is willing to sell at ₪102 |
As long as the highest buyer at ₪100 and the lowest seller at ₪101 hold their positions, no trade takes place. The difference between them is called the bid-ask spread. A new trade will occur, and the price on the screen will update, only when a new buyer agrees to pay ₪101 or a seller agrees to come down to ₪100.
Two ways to act: market order versus limit order
To send an order into the book, you have two basic order types. Each has a completely different priority:
1. Market order (Market/MKT): “Buy it for me now, whatever the price”
With a market order, you give top priority to immediate execution and give up control over the price. You specify only the number of shares, and the system buys them from the lowest-priced sellers waiting in the book at that moment.
How does it work? ReturnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. to our order book. Suppose the following sellers are waiting:
- 50 shares at ₪101.
- 100 shares at ₪102.
What happens if you buy 120 shares?
If you submit a market order to buy 120 shares, your order will consume the price levels one after another: 50 shares will be bought at ₪101, and the remaining 70 shares will be bought at ₪102. Your average price will be higher than the first seller’s price.
2. Limit order (Limit/LMT): “I will buy, but not at any price”
With a limit order, you give top priority to price and allow execution to wait. You set the maximum price you are willing to pay when buying, or the minimum price you are willing to accept when selling.
How does it work? If you submit a limit order to buy 120 shares at no more than ₪101:
- 50 shares will be bought immediately, because a seller is offering them at ₪101.
- The remaining 70 shares will wait in the order book as a new buy order. They will execute only if a new seller agrees to come down to your price. If the share continues to rise, the order may never execute.
What happens with partial execution and queues?
If you submit a large limit order—for example, 1,000 shares at ₪100—but only 200 shares are available at that price, you will receive a partial execution. Two hundred shares will be bought immediately, and the remaining 800 shares will continue waiting in the book.
Keeping things in proportion: is a market order really dangerous?
Beginning investors sometimes have an exaggerated fear of market orders. It is important to keep the issue in proportion: a market order is not inherently dangerous.
For most large and actively traded shares, and especially for ETFs that track major indices such as the S&P 500An index composed of 500 of the largest and leading companies traded on U.S. stock exchanges., thousands or millions of buyers and sellers wait at prices separated by fractions of a percent. When you buy a few thousand shekels’ worth with a market order during continuous trading, the trade will almost always execute very close to the price displayed on the screen.
When must you still be careful with a market order?
The risk of an unexpectedly poor execution price—“consuming price levels”—arises mainly in the following situations:
- Very small, thinly traded small-cap shares.
- SecuritiesA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits. with an unusually wide bid-ask spread.
- When your buy order is significantly larger than the quantity waiting at the first price level in the book.
- During periods of unusual market volatility, such as the minutes after an interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower.-rate announcement or a major macroeconomic event.
The exchange clock: continuous trading versus opening and closing
During continuous trading, which covers most of the day, buy and sell orders meet and execute one after another whenever the two edges of the book touch.
At the opening stage in the morning and the closing stage at the end of the day, the mechanism changes. Instead of executing trades immediately, the exchange allows orders to accumulate in the book for a period without execution.
The exchange computer then runs an algorithm that finds a single price—the price at which the largest possible trading volume can be executed among all the waiting buyers and sellers. Orders submitted during these stages therefore do not execute at the price displayed at that moment, but at the price set for everyone together.
Checklist: a few seconds of checking before you click
To avoid being surprised by the price you receive, adopt a simple habit. Before submitting an order in the app, take a quick look at the security’s data:
What should you check before submitting an order?
- What is the current ask price? This is your actual target price for an immediate purchase.
- How wide is the bid-ask spread? Is it small enough, or unusually wide and risky?
- Is there enough quantity—order-book depth—near the current price? Is the book deep enough to absorb the size of your order?
- What kind of security is it? Is it an actively traded and liquid asset, or a small and volatile share?
- What is my priority right now? Is immediate execution more important to me—market—or do I insist on a specific price and accept that I may not buy at all—limit?
The bottom line
When you buy a share, you are not buying it “from the exchange.” You are sending an order to the open market, and it needs to meet someone on the other side.
The order book shows who wants to buy, who wants to sell, and at what price.
A market order prioritizes fast execution.
A limit order prioritizes control over the price.
It is also important to keep things in proportion: for actively traded shares and large, liquid ETFs, buying a few thousand shekels’ worth with a market order during regular trading is usually reasonable. The risk of an unexpected execution increases mainly for thinly traded securities, wide spreads, or an order that is large relative to the book.
Do not be afraid of market orders; they are an excellent and efficient tool. Just make sure there is enough liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties. on the other side.
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Sources and links
- Tel Aviv Stock Exchange (הבורסה לניירות ערך בתל אביב) — Securities trading — An explanation of trading stages, order types, and how orders are executed.
- Tel Aviv Stock Exchange — Trading system — An explanation of continuous trading, opening and closing prices, and the order-matching mechanism.
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