In the growing advancement and the introduction of digital technology, many investors are getting into buying and selling of stocks on their own. This makes it important for them to know about different types of trade orders like a Market Order, limit order, etc.
In general, 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 the time of execution, the price of execution, being conditional or unconditional, and hence have different fees, brokerage charges, and other related costs.
Here is the information on one of the types of such orders called Market Order.
Gaining knowledge of this would help you to start investing with confidence. So start investing in a smarter way by knowing about the topic in the article below.
What is Market Order?
Market Order 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 this type of order is that it gets executed immediately. Thus, it ensures that the trade gets filled right then and there.
This order is placed by simply pressing the buy or sell button in the software. The Market Order has no restrictions based on the time of execution or price of order execution.
However, since such 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 charges are quite less.
Market Order Example
Let’s make the concept of market order more clear by considering an 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 this trade order in markets with high volume and liquidity and they are advised against in highly volatile markets.
Market Order Trade
For the investors, who got stuck in the wrong trade and want to exit or want to buy the securities at the current price, market order trade proves to be the best and most suitable option.
However, the trade is associated with a certain downside like slippage.
The market prices are quoted as the bid price and ask price, with the bid being lower than the ask and the difference is called the spread.
As soon as the order is placed, the trader buys or sells the securities at the ‘ask’ price or ‘bid’ price respectively, thus automating 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 it is a good and sure-shot entry or exit strategy.
It enables investors to exit the trade immediately by placing an order and selling the securities right away at the best possible price.
Similarly, a trader trying to enter the market, at whatever price, but immediately, uses a market order to buy the shares at the ‘current’ available price.
For the traders placing this order, 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, it can be placed by a trader who wishes to enter or exit the market irrespective of the price.
It 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.
Market Order Execution
Completing the process of buy or selling order for securities is what called the order execution.
The market order is executed when the order gets filled. For executing the market order, the investor submits the trade which is then forwarded to the broker. The broker than determines the best way to execute the order.
The market order is generally settled at a high price but in some cases, the market order is broken down into many small orders thus making it difficult for a broker to execute at the best price.
In all, the lag between the placement and settlement of order is associated with a certain risk that does not provide much profit or the value of securities as expected.
Market Order Vs Limit Order
As apart from the market order, there is another common type called a limit order.
On one hand, where the market order allows the investor to execute buy and sell of securities immediately, the limit order refers to all those pending orders that will be bought and sold at a particular price in the future.
Market Order does not consider the price but is executed immediately, while limit order is executed only when the minimum or maximum price set for buying and selling is reached.
Market Order enables the investor to enter or exit trading while the limit order has nothing to do with the immediate actions.
Both the Limit Order and Market Order have some additional costs linked with it. On one hand, the market order has low brokerage fees but the limit order is complicated and thus charges higher brokerage.
Here is the comparison table of Market Order Vs Limit Order.
Basis of Comparison
Involves buying and selling of stock at the current price
Buying and selling stock at the specific price in future
Buy or Sell Price
Order executed at the current price
Order executed at the price specified
Order submission and execution is done immediately
Order submission when the price level reached the trigger price
Is not used to set the stop loss
Is used to set stop loss
Market Order is most common among retail investors but involves a certain risk due to the highly volatile nature of the market. Thus, many retail investors do not get their orders filled in a real-time price.
Gaining complete information about the market and the stock price would take you in the right direction and hence profit.
Frequently Asked Questions
1.How does market order works?
The market order is buying and selling orders at the current price immediately. Generally, the market order is being used when there is more certainty of execution rather than the execution of price. In all, it allows an investor to enter or exit trading.
2. Is market order risky?
Well, when it comes to risk, the market order is the one that acquires the top position. It is something that buys or sells securities at the current market rate thus the investor has to buy or sell the stock at any price which might profit you with a good margin or discourage you with loss.
3.What is the difference between a market order and a limit order?
The order that is executed quickly at the current market price is the market order while the limit order is the one that sets the minimum and maximum price at which the investor is willing to buy or sell securities.
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