Investing
An Order Type Decides What Price You Actually Get
Instructions sent to a market differ in whether they prioritise certainty of execution or certainty of price, and no single order type can guarantee both at once.
Buying a listed investment requires an instruction, and the instruction has a type. The type determines which of two things the investor is prepared to give up.
Markets match instructions, not intentions
An exchange holds a book of outstanding buy and sell orders at various prices. A trade occurs when an incoming instruction can be matched against something already resting there.
The best available buy price and the best available sell price are not the same, and the gap between them is where the cost of immediacy sits.
An order type is a rule telling the venue how to treat that gap on the investor's behalf when the instruction arrives.
A market order buys certainty of execution
An instruction to trade at whatever price is available will almost always execute, because it accepts whatever the book currently offers.
What it does not do is guarantee the price. In a thin or fast-moving market the executed price can differ noticeably from the one displayed moments earlier.
The gap widens where the security trades infrequently, where the order is large relative to normal volume, or at points in the session when liquidity is naturally thinner.
A limit order buys certainty of price
Specifying a maximum price to pay or a minimum to accept means the trade will not execute outside that boundary, which removes the risk of an unexpected fill.
The cost is that it may not execute at all. An order resting outside the current market simply waits, and if the price moves away it waits indefinitely.
Partial execution is also possible, leaving part of the intended position filled and part outstanding, which is a state the investor has to manage rather than ignore.
Timing instructions sit alongside the price rule
Orders also carry duration terms, such as valid for the day only or valid until cancelled, and these determine what happens to an unfilled instruction at the close.
Some venues operate auctions at the open and close where orders accumulate and are matched at a single price, which behaves differently from continuous trading.
Orders placed outside trading hours queue for the next session, so an instruction given in the evening is exposed to whatever happens before the market opens.
Funds priced once a day work on a different principle
Many pooled investments are not traded on an exchange at all. Instructions accumulate and are executed at a single valuation point, typically once each day.
The investor therefore does not know the price when placing the instruction, which is a structural feature of the product rather than a shortcoming of the platform.
Understanding which of these two mechanisms a holding uses explains most of the confusion about why some trades have a visible price and others do not.
Questions readers ask
Does this mean I should sell before a fall?
Only if you can identify falls in advance, which the evidence suggests almost nobody does consistently. The practical response is choosing an allocation whose falls you can sit through.
Why do average returns overstate what I got?
Because averaging percentages ignores that each return applies to a different balance. The compound return accounts for that and is always lower when returns vary.
