What is a Market Order?

The following text comes from our post “What is the Difference in Order Types” Check it out for definitions of all other order types as well!

Market Order

 

A market order is the simplest of the order types. By selecting market order you simply buy or sell at the best current available price. You can generally get a good idea what that price will be based on the bid-ask spread.

 

The Bid-Ask spread tells investors two things; the best available price to buy (The Ask) and the best available price to sell (the Bid).

bid_ask_spread

Using the image above, you can see that the current ask is $82.42. This means that someone has put in an order to sell their shares for $82.42. If you are willing to pay $82.42 per share, the shares are yours. Therefore, by submitting a market order, you are saying to “Buy at the best price available”. A market order submitted at this time should execute at $82.42. However there are a few conditions that may prevent that from happening.

  • First, by the time you hit the button to submit your order someone else may have bought those shares. If no one else has orders in to sell shares at $82.42, you will buy at the next best price.
  • Second, if you are buying more shares than are available at $82.42, you may have to buy the rest of the shares at the next best price. For example, if you are trying to buy 2000 shares and there are only 1000 being offered at $82.42, you will be able to buy 1000 shares at $82.42, but the remaining 1000 shares will be bought at the next best price.

 

There are several risks to market orders:

 

  • If the security you are trying to buy is changing prices very rapidly, you may pay a much higher price per share than what you originally thought. At very volatile times in the stock market, prices may be changing very rapidly and the price you see may have changed significantly by the time you submit your order. This should not be a problem in ordinary times or for securities with high volume (in other words, are liquid).

 

  • If you submit a market order after hours when the stock market is not open for trading, the security you are trying to purchase may change price drastically by the time the market opens.

 

I am typing this up at about 6pm. The quote you see above, $82.41, is the price the security last traded for at 4pm before the market closed. If I submit a market order tonight to buy shares I will buy shares for the best price once the stock market opens up in the morning. It is highly unlikely that the security will begin trading at exactly $82.41 the next morning. As news happens overnight, investors may become more bullish and want to buy (and therefore be willing to pay more) in the morning or bad news may come out and investors may not buy unless the price falls. Under normal circumstances you should not be affected by these small changes, but it is a risk you take by submitting a market order.