What is a Market Order?
A market order is an investor’s instruction to a broker to buy or sell stocks, bonds, or other assets at the best available price in the current financial market.
It is the default choice for most investors when buying and selling. For large-cap stocks or popular exchange-traded funds (ETFs), there are normally enough buyers and sellers, ensuring that a market order is executed almost instantaneously at a price close to the most recent quoted price.
Key Features
- A market order directs the purchase or sale of a security at the current market price.
- Unlike limit orders, market orders execute immediately.
- Market orders are ideal for highly liquid large-cap stocks, futures, or ETFs.
- For less liquid or highly volatile assets, limit orders may be preferable.
- The market order remains the most common transaction in the stock markets.
Why Choose a Market Order
Market orders are straightforward and are meant to be executed quickly at the current asking price. Most stock buyers and sellers generally prefer this option, and it is usually the least costly due to lower brokerage fees.
For highly liquid large-cap stocks, market orders are a safe bet since these stocks experience high trading volumes and are less likely to have significant price discrepancies.
However, beware of market orders when trading small-cap or thinly traded stocks. The bid-ask spreads might be wide, leading to slower fills and potentially unfavorable prices.
Market Order vs. Limit Order
While market orders are basic buy and sell transactions, limit orders offer greater control. An investor setting a limit order specifies the maximum purchase price or minimum sale price acceptable. The order only processes if the asset hits that price.
Limit Orders are Beneficial When:
- Dealing with lightly traded or highly volatile shares.
- A pre-determined acceptable price is in place.
- Ensuring market prices don’t change drastically during the transaction’s execution.
Professional traders and day traders often use limit orders to manage the quick buying and selling of shares to exploit small price variations efficiently.
Example of a Market Order
Consider Excellent Industries with bid and ask prices of $18.50 and $20 respectively, and 100 shares available at the ask. If you place a market order to buy 500 shares, the first 100 shares will execute at $20. The remaining 400 shares will be filled at the next best asking price, possibly resulting in considerably higher prices if the stock is thinly traded.
Strategic Considerations
When executing a market order, remember you are accepting the market price, thus surrendering the bid-ask spread. Always check the bid-ask spread, especially for thinly traded securities, as overlooking it can be costly for frequent traders or those using automated trading systems.
FAQs on Market Orders
What does a market order mean?
A market order instructs a broker to buy or sell based on the prevailing market price. It’s commonly used by investors looking for quick execution.
How does a market order work?
A market order ensures an immediate transaction at the current market price, similar to a non-negotiable purchase.
What’s the difference between a market order and a limit order?
A limit order allows setting a specific maximum purchase price or minimum sale price, executed only when the price meets the criteria.
What is a batch order as opposed to a market order?
A batch order is an aggregated transaction conducted by brokerages at market open, consolidating multiple orders for the same stock submitted between trading sessions.
Related Terms: limit order, stock market, online broker, bid-ask spread, large-cap stocks.
References
- Corporate Finance Institute. “What is a Market Order?”
- U.S. Securities and Exchange Commission. “Types of Orders”.
