Trade orders are the instructions given to the stockbrokers regarding entry or exit from the positions while trading. They can be of multiple types, depending upon the requirement of the trader and they have a huge influence on the outcome of the trade.
These orders are placed into the trading platform after the trader has done his analysis and has decided to enter into a trade. These trading orders vary in terms of time of execution, the price of execution, being conditional or unconditional, and hence have different fees, brokerage charges and other related costs.
One of the types of trade orders is Market Order.
This is the most basic type of trade order, under which instructions are given to the broker or the software to sell or buy the security at the best available current price. The most important characteristic of a market order is that it gets executed immediately. Thus, a market order ensures that the trade gets filled right then and there.
Market Order is placed by simply pressing the buy or sell button in the software. The Market Order has no restrictions based on time of execution or price of order execution. However, since the market order is executed immediately, the securities are bought at the highest price and sold at the lowest price.
Since it is quite unrestricted and does not require too much work and analysis, the fee or brokerage charged for market orders is quite less.
For example, when the broker is instructed to buy 100 shares of PowerGrid Corporation from the share market, the order will be taken as a market order and the broker will buy 100 shares of the said company at whatever price the shares are trading at that very instant.
The upside is that the trade will definitely get filled as the trader has not specified any price or time frame for order execution, however, the downside is that the time lag between the trader placing the order and the broker executing the order, however small, may lead to a difference in the outcome that the trader was expecting.
It is because the stock markets are very volatile and the prices of securities may change drastically in a matter of minutes or even seconds for that matter. Therefore, it is suggested to use market orders in markets with high volume and liquidity and they are advised against of in highly volatile markets.
A huge downside of the market order is the slippage.
The market prices are quoted as bid price and ask price, with the bid being lower than the ask and the difference is called spread. When the market order is placed, the trader agrees to buy at the ‘ask’ price or sell at the bid price which automatically makes the trade out of money.
In this case, if the market order cannot be satisfied due to lack of volumes, the out of money amount increases in the form of slippage.
In such scenarios, one might wonder, why is the market order used anyway then?
The answer is that a market order is a good and sure-shot entry or exit strategy. If the trader is stuck in a bad trade and wants to exit immediately, then he must place a market order and the securities will be sold right away at the best available price and the trader is able to exit the trade.
Similarly, a trader trying to enter to market, at whatever price, but immediately, uses a market order to buy the shares at the ‘current’ available price. For the traders placing market orders, entry or exit is of prime importance, rather than the price of entry or exit.
Let’s quickly look at some of the pros and cons of using a Market Order:
Market Order Pros
Market Order Cons
Entry or exit any time
Paying higher price than necessary; buying at the highest price and selling at the lowest price
Larger lot of securities can be bought
Loss possible due to slippage
Can help entry into less liquid stocks
Almost guaranteed filling of order
Thus, a market order can be placed by a trader who wishes to enter or exit the market irrespective of the price. A market order guarantees the entry or exit but the price may not be the optimum price at which the security must have been bought or sold.
It is, therefore, advisable to use other types of trade orders, except when there is desperate need to enter or exit the market.
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