Types of Orders
Placing orders is an art in itself. Beginners often do not know when to use market orders and limit orders. Different orders are used in different market conditions. But the limit order is the one that is most versatile. Understanding a limit order is essential to your trading success. I will only discuss the case for buying, the reasoning and mechanism is the same for shorting.
Market Order
In a market order, you are basically giving instructions to your broker to buy at the prevailing price. You cannot set what price you want to buy. Market orders might be prone to slippage in fast moving markets. For example, if you give a market order to buy 10 lots, 3 lots might be filled at $10, another 3 lots at $10.50 and the remaining 4 lots at $11.00. We usually use a market order when we need to get in or out of a market fast, such as when the market suddenly moves against you drastically.
Limit Order
A limit order is different from a market order in that you can specify the price at which you want to buy. For example, if you specify you want to buy 2 lots at $10, you will not get a fill at prices above $10. Hence a possible scenario is you get both 2 lots at $10, or 1 lot each at $10 and $9.50. The beauty for the limit order is that you will not get a fill unless the price is better than what you specified.