What Is a Market Order? Definition and How It Works

Written by Parker PopeUpdated: 31st Jul 2021
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So, you’ve found the stock of your dreams. The stars have aligned! You see something the market doesn’t, and you just know this one’s going up.

If you’ve never placed a trade, you might be caught by surprise when you’re presented with a complicated screen with several selections available, and you have no idea what everything means.

For the most part, investment companies and brokerages try to make this process as simple as possible, but it’s always worth understanding as much as possible about the order screen so that you can avoid any mistakes and buy your dream stock exactly where you mean to.

We’ll start with the market order, which is the most common type of order, and help you understand what it is.

What is a Market Order?

When a market order is placed, it tells your broker to buy or sell (whichever you’re trying to do) a stock or fund at the current market price that the asset is trading at.

The type of order you place has the largest effect on the price at which your order gets filled.

You might be confused, thinking that this is the only way to make a stock or fund purchase.

However, that’s just because it’s usually the default setting that brokers and financial firms keep on the order placement form to simplify the process.

Depending on your broker, you may have several types of orders you can place that affect the price at which your order is filled. The primary two are a market order and a limit order.

While the market order places your order the fastest at the current market price, a limit order allows you to set a price at which you’d like your order to be placed. We’ll get a bit more into this later.

The market order is the default for several reasons.

  • Liquidity: Most stocks traded on the NYSE or NASDAQare large companies with many participants trying to place orders. When you place a buy order, you need a sell order on the other side so that you can be filled. Higher liquidity is ideal for market orders.
  • Speed: Most average investors tend to get concerned when their orders sit pending for too long. Market orders generally allow the fastest fill, which is especially helpful in volatile markets.

Understanding Market Orders

Some very complicated computers pop on when you place a market order and work in literal nanoseconds to fill your order.

You might place a buy order in New York and see it filled almost the moment you click the “buy” button.

You may never know who or what was on the other side of your trade, but every buy order that gets filled requires a sell order.

In a perfect world, your order gets placed at the exact price you pressed the “buy” button. However, this does not always occur.

If you are buying a small-cap stock with very low liquidity, you might place a market order and experience what is known as “slippage.”

“Slippage” is when you place an order at one price but get filled at a slightly different – sometimes very different – price.

That is because a market order is trying to put you in the market quickly, and if there aren’t enough orders at the price quoted, you’ll get filled immediately at the closest price possible above the market price, which would usually be above where you want to be.

When a price is quoted on your platform, the quote is usually in the middle of the bid-ask spread.

The bid is the price where buyers are willing to pay for the stock, and the ask is the price where sellers are willing to sell the stock.

With fewer market participants, this spread tends to be wider. Even though the middle price is quoted, a smaller cap stockmight require a market order to fill closer to the higher end of the range, where a seller is willing to part with their stock.

Pros and Cons of Market Orders

Pros:

  • Executed quickly
  • Makes the process of buying stocks simpler
  • You can avoid fees by using market orders

Cons:

  • No guarantee of the execution price
  • If you trade a stock with lower liquidity, you might experience slippage on both the entry and the exit from the trade
  • Market orders placed outside normal trading hours will trade at the opening price the following trading day, and overnight price fluctuations might result in dramatically different prices than what was quoted when you place the order.

Example of a Market Order

Let’s say Steve is placing an order for AAPL (Apple’s stock). Steve has a lot of money, so he wants to place an order for 100 shares of AAPL.

He goes to the website for his broker or investment firm, types in the ticker symbol (AAPL), and then clicks the “trade” button or whatever method is used to arrive at the order form.

Arriving at the order menu, AAPL will be shown along with a quoted price at the time.

Steve enters “100” into the area where the number of shares is entered and then hits the buy button.

Let’s say that Steve was looking at a quoted price of $144.10 at the moment he clicked the buy button.

It’s entirely possible that he would get filled at exactly or very close to that price, give or take a few cents per share.

Believe it or not, GOOG (one of Alphabet Inc.’s tickers) is relatively low liquidity. This is because of the high price of the stock.

If Steve wanted to buy 10 shares of GOOG – he’s not that rich – at a quoted price of $2,720.00 per share, he would have to contend with a much higher bid-ask spread and risk getting filled $3-4 higher rather than a few cents as was the case with AAPL.

Market vs. Limit Order

As mentioned earlier, a limit order doesn’t necessarily guarantee you’ll get filled on an order, but you’re guaranteed to get filled at the price you dictate when you place the order.

This is essentially the opposite of a market order. Some brokers may charge a fee to place a limit order, so make sure to check this before opting for it.

There are several kinds of limit orders, and they can get extremely complicated.

Also, a very rudimentary understanding of limit orders can get you into trouble, so we’ll just list them here for now.

  • Buy limit: this is an order to buy at a specific price
  • Sell limit: this is an order to sell at a specific price
  • Buy stop: this is an order to exit a short position by buying a stock at a specific price
  • Sell stop: this is an order to exit a long position by selling a stock at a specific price

Market Order FAQs

What does market order mean?

A market order is placed at the market, hence the name. You are guaranteed to get filled on your order, but you are not guaranteed a price at which your order will be filled.

How does a market order work?

When you place a market order, you will be connected with a sell order for the same asset by a computer algorithm that fills you as fast as possible. This may mean filling your order at a higher price where there are more willing sellers.

What is the difference between a market order and a limit order?

A market order, as mentioned, is the fastest fill, but the price isn’t guaranteed.

A limit order is the opposite – you are guaranteed a price that you designate when you place the order, but the stock’s price might never reach that, and you may not get filled.

What is the difference between a batch order and a market order?

Batch order is a complicated trade that involves several orders being placed at once. It usually consists of a market order followed by one or two limit orders, designating the risk and reward to be made on a trade. It’s sometimes known as a “bracket order.”

Bottom Line: What Is a Market Order?

A market order is the most common, fastest, and simplest, in theory, to execute all the order types available in finance.

There are some drawbacks, but most people will find that the market order suits their needs as long as they invest in stocks with high liquidity.

Parker Pope
Parker Pope

Parker has spent over 10 years studying the financial markets. He currently manages his own portfolios by trading options and futures, and he’s excited to share his experience with those interested in a hands-on approach to their investments. No fancy tricks or indicators, just a commitment to understanding risk management and knowing the “why.” While he invests actively, he’s built a wealth of knowledge about personal finance and commits his efforts to writing about topics to help people take control of their finances. Parker’s areas of expertise are financial markets and investing.