What is market order?
Definition
A market order is a request from an investor to a broker to purchase or sell stocks, bonds, or other assets at the most favorable price that is currently available in the financial market. For the majority of investors, this is the standard option for buying and selling. In situations where the asset is a high-cap stock or a widely-traded ETF, there will be many buyers and sellers ready to participate. This implies that executing a market order will be almost immediate, and the price paid will be very similar to the most recent posted price.
Understanding Market Orders
When using an online broker, pressing the "buy" or "sell" button usually opens an order form that the user must fill out. This form requires the stock symbol, whether the user is buying or selling, the number of shares, and the price type. The default price type is typically "market," which means the investor is not setting a price but is willing to pay the current market price. However, there are other options available, including "limit" orders that allow investors to buy or sell at or above a set price. With limit orders, investors can feel secure in stepping away from their device knowing that they won't miss out on opportunities.
Example
Assuming Excellent Industries has a bid-ask spread of $18.50 (bid) and $20 (ask), and there are 100 shares available for purchase at the ask price. If a trader places a market order to buy 500 shares, the first 100 shares will be bought at the ask price of $20. The initial 100 shares of a market order to buy 500 shares of Excellent Industries will be executed at the ask price of $20. The remaining 400 shares will be filled at the best asking price for sellers of those shares, which could be higher than the initial asking price if the stock is thinly traded. Therefore, using limit orders can be a better option for certain transactions, as they provide traders with more control over the execution price compared to market orders or stop orders.
Gist
- For buying or selling large-cap stocks, futures or ETFs, market orders are the most appropriate.
- These are instructions to immediately buy or sell a security at the current market price.
- Market orders are the most widely used transaction type in the stock market and are the default choice in most online broker transaction pages.