Market orders are the standard choice for investors who prioritize immediate execution over a specific price when purchasing almost any exchange-traded asset. This includes stocks, ETFs, cryptocurrencies, options, and futures.
Imagine yourself going to the grocery store to buy some bananas. Once there, you’re not going to haggle with the cashier over the price of the bananas, you’re simply going to pay the price they’re asking you to pay, or you’re not. The same goes for buying a stock – when you issue a market order, you’re agreeing to pay market price for it. If you’re selling a stock, you’re also agreeing to do so at the current market price.
Speed over price
At any given time you are able to see what the market price is for a stock. However, given a market order’s preference for speed over price, it is possible that the market price can change – slightly – between the time you see it and the time you send your order.
It is worth noting that this discrepancy, if it occurs, will most often only be the difference of a couple of cents here or there, especially if you’re buying or selling one of the stock exchange’s most popularly traded companies.
Buying and selling
When looking up a stock on most brokerages, multiple numbers will appear and will differ depending on whether you are planning to buy or sell.
- Buying: When buying a stock using a market order, the price you are looking for should be the “ask.” The ask is the lowest price at which someone is currently willing to sell that stock.
- Selling: When selling a stock using a market order, the “bid” is what you should look for. The bid price shows you the highest price another buyer is willing to currently pay for that stock.
When searching for a stock, every brokerage should show you – quite clearly – what both the “ask” and the “bid” price are at any given moment.
Share pricing
If you are looking to place a very large order (typically over 100 shares) it is entirely possible that the seller on the other end of your trade doesn’t have that many shares to sell.
This does not mean that your market order won’t be filled, rather that it must be filled by more than one seller. The result of this can mean that your order will be met with a combination of prices, all of which will be the next best available after the initial market price.
The bid and ask price won’t typically show you what that second (or third, or fourth) price is but, as stated above, with popularly traded companies, it is typically only a few cents’ difference at most.
Less popularly traded companies
For less commonly traded companies (think penny stocks or companies with low average daily volume), it is possible that the price beyond the bid and ask is off by more than just a couple of cents.
In some circumstances, the difference could be upwards of $0.10 to $0.20 per stock, depending on the company. As a result, when placing a large order for these stocks you could be in for a surprise if you place a market order and end up paying much more than you originally estimated.
To ensure you’re staying within your purchasing budget when buying or selling these types of stocks, it may be best to use a limit order.
Summary
Market orders are the most common way to purchase exchange-traded assets due to their simplicity and speed. They are best for people who wish to immediately buy or sell a stock at its current market price.
