Investing in the stock market can be an intimidating prospect, especially for those who are new to the world of finance. With so many different terms and concepts to understand, it can be overwhelming to know where to begin. One concept that is crucial to understand is the market order.
In this guide, we’ll take a closer look at what a market order is, how it works, and what you need to know before placing one.
What is a Market Order?
A market order is an instruction to a broker to buy or sell a security immediately at the best available price. Unlike a limit order, which specifies a maximum or minimum price at which a trade can be executed, a market order is executed at the prevailing market price.
How Does a Market Order Work?
When you place a market order, your broker will execute the trade at the best available price in the market. This means that you’ll get the trade done quickly, but you may not necessarily get the exact price that you were hoping for.
For example, let’s say you want to buy 100 shares of Apple stock, and the current market price is $150 per share. If you place a market order, your broker will execute the trade at the current market price of $150 per share. However, if the price of Apple stock were to suddenly drop to $140 per share before your order is executed, you would still pay $150 per share.
When to Use a Market Order
A market order is best used when you need to buy or sell a security quickly and price is less of a concern. This is often the case for traders who are looking to buy or sell a security in the short-term, as they may be more concerned with getting the trade done quickly than with getting the best possible price.
Market orders are also useful when trading highly liquid securities, such as those listed on major stock exchanges. These securities tend to have a lot of buyers and sellers, which means that the bid-ask spread—the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept—is usually small. This means that the price you pay or receive when executing a market order is likely to be close to the current market price.
Risks of Using a Market Order
While market orders can be useful in certain situations, there are also risks associated with using them. One of the biggest risks is that you may not get the price you were expecting. This can happen if the market is volatile or if there are not enough buyers or sellers in the market to execute your order at the price you want.
In addition, market orders can be subject to slippage, which is when the price at which your order is executed is different from the price you expected. This can happen when the market moves quickly or when there is a large order in the market that disrupts the supply and demand balance.
Finally, it’s worth noting that market orders can be more expensive than limit orders in some cases. This is because brokers may charge higher fees for executing market orders due to the increased risk involved.
Tips for Using Market Orders
If you decide to use a market order, there are a few tips that can help you minimize your risk and improve your chances of getting a good price:
- Use market orders only when you need to buy or sell quickly and price is less of a concern.
- Make sure you understand the risks associated with market orders, including slippage and the possibility of not getting the price you were expecting.
- Consider setting a stop-loss order to protect yourself in case the market moves against you.
