Order Books, Market and Limit Orders: How Is a Stock Purchase Actually Executed?

The order book is the exchange's digital bulletin board. It is where the buy and sell orders of investors who have not yet found a counterparty wait. The book is divided into two sides:

• Buyers (demand / Bid): offer prices and wait for someone to sell to them.
• Sellers (supply / Ask): specify asking prices and wait for someone to buy from them.

Suppose the order book for a particular stock currently looks like this:

As long as the highest buyer offers 100 ₪ and the lowest seller asks 101 ₪, there is no match and therefore no trade occurs. The gap between them is called the bid-ask spread (Spread). Once a buyer agrees to pay 101 ₪, or a seller agrees to sell at 100 ₪, a new trade can occur and the price on the screen will update.

To send an order into this book, you have two basic order types available, each with a different order of priority:

1. Market order (Market / MKT): "Buy for me now, at the price available in the market"

With a market order, you prioritize fast execution and forgo setting a price limit. You determine the number of shares, and the system buys them from available sellers, starting with the cheapest, according to trading rules.

How does it work? Let us 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 there:

• 50 shares at 101 ₪
• 100 shares at 102 ₪

2. Limit order (Limit / LMT): "I will buy, but not at any price"

With a limit order, you set the maximum price you are willing to pay when buying, or the minimum price you are willing to accept when selling.

The order can execute immediately if there are matching offers. Otherwise, it may wait in the order book, depending on its validity period and settings.

How does it work? If you sent a limit order to buy 120 shares at a maximum price of 101 ₪, assuming the offers in the example are still available:

• 50 shares will be purchased immediately at 101 ₪.
• The remaining 70 shares will remain waiting in the order book. They can be purchased at 101 ₪ or less if suitable supply becomes available before the order expires.

If the price remains above the limit until the order expires, the remaining shares will not be purchased.

If you sent a limit order to buy 1,000 shares at a maximum price of 100 ₪, but only 200 shares are available to buy at that price or less, you may receive a partial execution. 200 shares will be purchased, and the rest will continue waiting, according to the order settings.

Beginner investors sometimes have an exaggerated fear of market orders. It is important to put things in perspective: the risk of execution at a surprising price depends on the securityA 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.'s LiquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties., the size of the order, and market conditions.

In large, liquid stocks and large, actively traded exchange-traded fundsA security traded on an exchange that tracks a particular index, allowing an investor to buy a "basket" of assets in a single transaction. tracking major indices, such as S&P 500An index composed of 500 of the largest and leading companies traded on U.S. stock exchanges., bid-ask spreads during regular trading hours tend to be small. When your purchase is small relative to the available supply, a market order will generally be executed quickly, at a price close to the available ask price at the time of execution.

However, there is no guarantee that the order will execute at the most recent trade price shown on the screen. It is important to check the available supply in the specific fund you are buying, rather than relying solely on the fact that it tracks a well-known index.

When should you be especially cautious with a market order?

The risk of execution at a poor and surprising price increases mainly in the following situations:

• Small stocks or thinly traded securities.
• Securities with a wide bid-ask spread.
• An order that is large relative to the quantity available at nearby prices.
• Unusual volatility, for example following 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. announcement or a significant event.
• Around the market open, when prices may change rapidly relative to the previous close.

During continuous trading, buy and sell orders meet and execute continuously whenever a price match is created.

In opening and closing auctions, by contrast, orders accumulate ahead of the determination of a common price. The exchange sets a price according to the auction rules, aiming to match as large a quantity of buy and sell orders as possible, subject to price limits and other rules.

Orders that participate in an auction and are executed in it are executed at the price set in the auction. Not every order will necessarily be executed, and partial execution is also possible.

Trading phases and the ability to participate in an auction vary among exchanges and trading systems.

Yes, in some trading systems. For example, if you enter an order in the morning in Israel to buy a U.S. exchange-traded fund, the system can hold it for execution when regular trading opens.

• If the system allows MKT: the order will wait and may be executed at or after the open, based on available prices and according to the system's rules.
• If the system allows only LMT: you can set a maximum purchase price higher than the last displayed price. If, at execution, there are sellers at a price below the limit, you may buy at the lower price—not automatically at the price you entered.

For example, if the fund closed at 100 dollars and you entered a limit of 105 dollars, and the order participates in an opening auction that sets a price of 101 dollars, the portion executed in the auction will be purchased at 101 dollars, not 105 dollars.

In a very liquid stock or ETF, when the purchase is small relative to available supply and the limit permits it, execution is generally expected to be quick at the prices available in the market.

In a security with low Liquidity, by contrast, it is advisable to avoid entering a limit significantly higher than the last price just to ensure a purchase. There may be few shares for sale at nearby prices, and your order may also buy from more expensive offers, up to the limit you set. As a result, you could pay a price significantly higher than the price you saw on screen.

1. Tel Aviv Stock Exchange — Trading System — explanation of trading phases and the order execution mechanism.
2. U.S. Securities and Exchange Commission — Order Types — explanation of market and limit orders and the difference between the last price and the execution price.
3. U.S. Securities and Exchange Commission — Trade Order Execution — explanation of order routing and possible price changes before execution.
4. Charles Schwab — Trading Outside Regular Hours — explanation of extended-hours trading, order types, and Liquidity limitations.