A market order is considered the simplest of all trade orders.
What Is a Market Order?
It is a buy or sell order that should be executed (filled) immediately at the current market price, as soon as the buyers and sellers are found. This type of order focuses on execution rather than on price. It means that you should use a MO only if you are in a rush and thus ready to pay higher fees caused by the slippage.
If you do not give your broker any extra instructions, the trade will automatically be entered as a MO. In highly volatile markets, the price paid or received may be quite different from the last price quoted before the order was entered. For example, you would like to buy 10 shares of company X. The current market price is $3 per share.
You call your broker and initiate a market order. The broker starts a transaction to find a seller. As today this is done electronically, the seller is found almost instantly. Even if the market price of a stock is $3, the seller may request a different price. The broker initiates an order at the ask price. You did not specify how much you were going to pay - you only told the broker that you wanted 10 shares. It is possible to split a market order across several parties on the other side of the transaction, resulting in different prices for some of the shares.
Market Order Slippage
Every time a trader wants to execute a market order, they are willing to buy at the ask or sell at the bid. Therefore, the person executing a MO is immediately giving up the bid-ask spread. For this reason, it is sometimes a good idea to look closely at the bid-ask spread before placing an order. Otherwise, it may result in very high costs. This is especially important for anyone who trades frequently or uses an automated trading system.
Market Order vs Limit Order
It the most basic trade orders. If you would like to have more control over the prices, you should choose a limit order. Unlike MOs, limit orders give investors more control over the bid or ask by setting an acceptable maximum purchase price or an acceptable minimum sales price. A limit order is good for trading highly volatile securities or those that have wide bid-ask spreads. Though you will get higher commissions from brokers for a limit order, using MOs can sometimes lead to unintended significant costs.
Let's assume that the bid and ask prices for shares of company A are $17 and $21, respectively, with 100 shares available at the ask. If you place a MO to buy 300 shares, the first 100 will fill at $21. But the next 200 will fill at the best ask price for sellers of the next 200 shares. If the stock is very thinly traded, the next 200 shares may be executed at $23 or more. That is why it is a good idea to use limit orders for thinly traded securities.
A market order is the simplest trade order type that is executed immediately at the current market price. Traders typically use MOs when they are in a hurry and want to execute the order no matter the price. Alternatively, a limit order gives the trader more control over the price and is not executed immediately. Though it involves higher commissions, it can save the trader from fluctuations and high bid-ask spreads that can lead to significant losses in the case of a market order.