It sounds like this“The price I see on screen is what I will pay when I press buy.”
Thinking the price on screen is the price you'll get
Why it feels right
The big number looks like a price tag. It moves, but at any moment it reads as the current price, so the natural thing is to treat it as the price and to expect it when you press the button. Shopping online has trained us to expect the displayed price to be the price charged.
Why it’s wrong
The price on screen is the last trade, which is history. A market order pays whatever sellers are asking when it arrives, which may be higher. A limit order sets the most you will pay, and you can get a better price, never a worse one.
A worked example
The number in large type is usually the last price at which a trade happened. Nothing guarantees the next trade will happen at that price. The prices you can actually deal at are the bid and ask, and they move all the time, sometimes many times in a second.
A market order says 'buy now at whatever is available'. It takes the lowest ask, and if you want more shares than are on offer there, it takes the next one up, and so on. In a fast move you can pay noticeably more than the number you saw when you tapped.
A limit order says 'buy, but pay no more than this'. It protects you against the price running away. If the ask is 100.10 and your limit is 101, you pay 100.10, the better price, but never more than 101. If the ask moves above your limit, the order waits instead of filling.
How to catch yourself
- You expect to pay exactly the number on screen.
- You send a market order in a fast-moving or thinly traded stock.
- You think a limit price means you will pay that price.
What to hold instead
The price shown is the last trade, not an offer. A market order pays what sellers are asking right now. A limit order sets the most you will pay: you can pay less, never more.
Where you’ll meet it
- Placing an order in a quiet small-company stock.
- Trading when the news breaks and prices jump.
- Deciding whether to use a market or limit order.
Questions people ask
- Why did I pay more than the price I saw?
- Because the screen showed the last trade, and by the time your market order arrived, sellers were asking more. In fast or thin markets the gap can be large, which is why limit orders are safer.
- What is a limit order?
- An order that sets the most you will pay when buying, or the least you will accept when selling. It fills at that price or better, and waits if the market doesn't reach it.