In this stock market order types tutorial, we discuss what a market order is, and how to use it when buying and selling stocks.
Order types can be confusing. We’re going to break down market orders in more detail, see how you actually place a market order, and some of the pros and cons of using this order type.
What is a Market Order?
Placing a market order means that you are willing to buy a stock at the current market price, or whatever price the stock is currently trading at.
The market price of a stock is constantly changing depending on the supply and demand.
With a market order, you cannot specify the price of the trade.
How Does a Market Order Work?
Let’s see how this works, and where a market order can go wrong.
When you place a market order it is going to buy or sell the stock at whatever the current price is between when you press the buy button and when the trade executes.
Real Time Quotes
Not every brokerage has real time quotes, or in other words shows the live prices of stocks. Some brokerages and trading platforms have a 20 minute delay on their stock prices and data.
If you place a market order, and you’re looking at a chart with delayed data, this means that the price potentially had 20 minutes to change direction.
For longer term investors, this may not have as much of an impact as it would on say day traders. But it’s still important for you to look up whether or not the platform you’re using has delayed market data.
Even with live market data, it’s still possible that the price will change.
Market Orders & Volatility
With extremely volatile stocks, or stocks that move very quickly, there is a risk that the order can execute at a different price.
You can place a market order, but in the few milliseconds it takes for your trade to execute, the stock can skyrocket or take a steep dive.
This means that although your order was placed at one price, it can actually goes through at a much worse price.
This can occur when buying and when selling.
If we want a little bit deeper understanding of a market order, it’s important to know how the bid-ask spread works.
The bid is the price a buyer is willing to pay for a stock.
And the ask is the price a seller is willing to sell their shares for.
The difference in between the highest bid price and the lowest ask price is called the spread.
This bid-ask spread is very dependent on liquidity, which is the volume of activity (or how much activity) there is for a stock.
With a market order, you are immediately agreeing to buy at the ask price or sell at the bid price.
If you are using a trading platform like Think or Swim, you can see the bid and the ask prices in the Level 2 panel.
How the Bid-Ask Spread Affects Your Order
Say the ask price of a stock is currently at $10, with 100 shares available.
If you were to place a market order to buy 300 shares, the first 100 will execute at $10.
BUT, the next 200 shares will fill at the best asking price. If the stock is traded at a high volume, it’s more likely that someone else will be trying to sell the stock somewhere around $10 as well.
However if the stock has very low volume, the next best asking price may be much higher. So it’s possible that the remaining 200 shares of your order could be filled at a much worse price.
This is why many people like using limit orders rather than market orders.
How to Place a Market Order
Fractional Share Market Orders
Different brokerage firms handle fractional investing in different ways. Some firms only allow market orders for buying fractional shares.
You will of course want to check this for the brokerage that you choose to use.
Pros & Cons of Market Orders
- Fast, and you can get in/out at any time
- Sometimes there’s a higher change of filling the order
- You cannot specify the price you want
- If the price moves too fast, the price could be very different from the price when you placed the order