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What is a market order
When an investor wants to buy or sell a security, he can use several types of orders to execute the trade. One of the most frequently used order types is the market order. Market order ensures that your trade is executed. In this article, we’ll take a closer look at market order, its types, and its benefits. So let’s get started.
Definition
A market order is an order to buy or sell a security at the current market price. Basically, you instruct your broker to purchase or sell securities at whatever the current market price is upon his/her receiving the order.
Market orders are completely FIFO (first in, first out) meaning they will be executed based on when they were placed. This is different from other types of orders such as limit orders, which can be canceled.
A market order does not guarantee the price that you will get for your trade, but it does ensure that your quoted price is within the stock’s trading range. You may get a slightly worse quote if there are no buyers or sellers at that given time.
Different types of Market Order
There are mainly three types of Market Order
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Limit Market Orders
A limit market order is an order to buy or sell a security at no worse than a specified price (or better). The execution will only occur if the market moves to that given price (or better). For example, if you place an order to buy shares of Google at $610, the order will only be executed if/when it moves to that price or lower.
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Stop Market Orders
When you place a stop market order, the deal is carried out when the market price reaches your specific stop loss level. What this means is that you won’t receive the best possible price since the trade is only executed when there’s a sharp drop or rise in price. Sometimes, we also see stop-limit orders.
This type of order is often called stop loss in the financial media. Many investors believe that it provides protection for their portfolios. This is only true if the market moves slowly and there is sufficient liquidity. In a fast-moving market, stop loss might not be an effective risk-management tool.
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Market-If-Touched (MIT) Orders
A market-if-touched order is an order type that specifies to buy or sell a security at the best possible price, but only if the market price touches or goes through a given stop loss level.
Example
If you place a limit market order to buy shares of Google at $610, the order will only be executed if/when it moves to that price or lower.
Market Order Benefits
Market orders have clear benefits as compared to limit and other types of orders, especially when it comes to low liquidity issues. Here are some of them:
- Market orders provide a guarantee of execution
- Market orders can help detect patterns in a security’s behavior
- Market orders provide flexibility and ease of use
Conclusion
A market order is a type of trading order that guarantees the execution of your trade, but it doesn’t guarantee the price. When you place a market order to buy or sell, you instruct your broker to purchase or sell securities at whatever the current market price is upon his/her receiving the order.
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