DEFINITION of a market order
A market order is an instruction that the trader gives to a broker to execute a trade immediately at the best available price.
WHAT IT IS IN ESSENCE
When using this order, you almost have guarantees that your order will be executed. When you call your broker and say, “Buy 10 shares of XYZ stock,” the broker will enter the trade as a market order and you will buy XYZ at whatever price it is trading at when the order is fulfilled.
The downside is that the price you end up paying, may not be the price you were quoted before you decide to trade the stock. Trade execution is not instantaneous, and markets can move dramatically in very little time.
HOW TO USE
Market orders are the simplest kind of order, with no regulation of a particular price or timeframe included.
They have very quick execution and sometimes make lower commission than other types of orders.
With this, you don’t have any control over the price at which your order is filled.
Your market order will be filled at the then market price which may be worse than the indicative prices visible when placing the order.
In most cases, you should avoid using this.
Not only will you pay top dollar or sell for the bottom price, but you will also pay for a little mischief known as slippage.
Slippage occurs when a market maker changes the spread to his advantage in market orders.
Say you are caught in a bad position and there is moving against you. Well, it’s time to bail out in a hurry by using a market order and not worrying about slippage.
Most investors are very concerned about controlling entry and exit prices. However, there will be times when buying or selling the stock quickly becomes more important than price.
It becomes dangerous when you convince yourself that you have to own a hot stock at any cost and use market orders to grab shares.
Most investors won’t be concerned with a few cents’ loss to slippage. But you have to be careful or it can be much worse than pocket change.
When a market order has been executed, it is referred to as a ‘ filled order’.