A Market order is among the Stock Market Order Types. It is an instruction from a trader to a broker to buy or sell securities at the best prices currently available in financial markets.

Most of the time, it is the default choice for most investors to buy and sell. If the asset is a large-cap Stock or a popular exchange-traded fund (ETF), there will be plenty of buyers and sellers willing to buy and sell. This means that market orders will be filled almost immediately at a price very close to the latest posted price that investors can see.

How Does it Work

When you tell your broker to buy or sell a specific stock for you, you can usually choose between several different options to understand How to submit your transaction.

However, if your brokerage services are available online, these various options may appear under the heading “Order Type” when you submit a trade. While it totally depends on your broker, if it is providing order execution options for trade as a market order, Limit Order, stop order, or stop limit order.

If you submit a market order to your broker to buy or sell the stock your broker will execute the trade immediately if the market is currently open.

While using this order, you cannot guarantee a specific price. The price will be determined based on the price available on the market when your order is filled. It is called a “market” order because the market determines the price.

Market prices may be higher or lower than the last transaction price you see on the website. If the stock price fluctuates, or if you place an order at the close, the price may fluctuate significantly.

Example of a Market Order

There are two conditions when you trade a specific stock whether the market is open or close.

Let’s look at an example of how a market order works when the market opens. For a popular stock like Apple (AAPL) or Tesla (TSLA), you want to sell 10 shares of AAPL. When you log into your broker’s website. AAPL stock is trading at $275.89.

You have now submitted a market order to sell 10 shares. After a few minutes, you will receive a confirmation email from the brokerage that the order has been filled at the average price of $275.88. The price change is close to zero because you submit a market order for a large batch of shares when the market opens.

Now let us assume how market orders work when the market is closed.

You want to buy stock in Apple (AAPL). When you look at the broker’s website, the last traded price was $250.78. You decide to submit a market order for 10 shares.

After the market opened, AAPL’s new “ask” price was $250.85. The broker submitted the order and ended up buying 10 shares of Apple for $2508.50 ($250.85*10), a little more than you originally expected.

When To Use a Market Order

You can use it when trading securities in high volumes. This means that such security, such as large-cap stocks, futures, or ETFs, can be filled quickly.

This is the opposite of stocks with average daily volume (low liquidity). Trading in these stocks is thin, making bid-ask spreads a bit wide. And take a lot of time to be filled. This means you can fill securities at high transaction costs. In general, this order type may be a solution, especially if the market is moving against you.

You can use a market order to quickly get out of trouble without worrying about the current selling price. Indeed, most investors want to control market entry and exit prices.

Advantages and Disadvantages of Market Orders

Advantages

• This is the most common and straightforward transaction on the market.
• It is designed to execute as quickly as possible at the current asking price.
• Market orders are also usually the lowest-priced options.
• A safe option for any large-cap stock.
• Market orders ensure that your trades are done, which means you don’t miss out on buying the stock you want.

Disadvantages

• It is less reliable when trading illiquid investments.
• It can fill slowly at a disappointing price.
• Submitting them after the trading day is over is risky as prices can fluctuate significantly when the market opens.
• You will also incur some slippage costs.

Final Thoughts

A market order directs your broker to trade security immediately, regardless of price. This is a good option for investors determined to trade stock as soon as possible.

When choosing the right order type, investors need to consider what risks they are willing to accept in executing their strategy. This involves deciding what is more important, the speed of execution or the trade price protection. The use of limit orders allows ETF market makers to sometimes need time to update their liquidity supply in order to execute trades appropriately.

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