Market orders don’t give investors as much control as limit orders, but they usually execute very quickly.
Aidan Hancock via Unsplash; Canva
What Is a Market order and How Does It Work?
When an investor instructs their broker (usually via an electronic interface on their phone or computer) to buy or sell a stock on their behalf, they do so with an order. There are several different types of orders, but market orders are the simplest and most common—they simply instruct a broker to buy or sell a particular stock at the best available price as soon as possible.
For stocks with small bid-ask spreads (i.e., large, highly liquid companies with high trading volume), a market order is likely to execute almost immediately at a price nearly identical to the last quoted price for the stock in question.
Market Orders at a Glance
What? Buy or sell shares of a stockWhen? As soon as possiblePrice? Best available at current time
How Do Market Buy Orders Work?
When an investor places a market buy order, their electronic broker executes the order by identifying the lowest available ask price at that moment and buying the shares in question at that price. Ask prices are what sellers (usually market makers) will accept for a stock.
How Do Market Sell Orders Work?
When an investor places a market sell order, their electronic broker executes the order by identifying the highest available bid price at that moment and selling the shares in question at that price. Bid prices are what buyers (usually also market makers) will pay for a stock.
Do Market Orders Guarantee a Specific Price?
For most large, liquid stocks that trade on major exchanges, market orders execute almost immediately (assuming they are placed during trading hours) and usually at a price identical (or very close) to the last quoted price for the stock in question. That being said, no specific price is guaranteed by a market order.
If the lowest ask or highest bid for a given stock has changed since the last time that stock was traded, a market order may execute at a significantly different price than the last trade price quoted by the market. This is most likely to occur when trading illiquid stocks with low trading volume—particularly penny stocks that trade over the counter instead of on major exchanges.
Even on major exchanges like the NYSE and Nasdaq, if a market order is placed outside of trading hours, a significant change in price is more likely. Often, after-hours news and events (like earnings calls or economic forecasts) can affect the market value of a stock, so if an order is placed after-hours and isn’t canceled before the next market open, a trade could execute at a very different price than what was initially quoted by the exchange. For this reason, market orders are best reserved for active trading hours.
When Should You Use a Market Order?
Market orders execute almost immediately during normal trading hours, so they are a convenient way to buy or sell highly liquid stocks that trade on major exchanges and have relatively low bid-ask spreads.
Using market orders after-hours or to trade less-liquid stocks can be risky, as a stock’s market price may change significantly before the order executes. Investors interested in making well-timed trades once stocks exceed or dip below certain target prices may want to consider using other order types instead.
What Other Order Types Are There?
Market orders are only one of three main categories of orders an investor might use to buy or sell shares. The others—limit and stop orders—allow investors more control over how their trades might be executed.
Limit Orders
Limit orders instruct a broker to buy or sell shares of a stock if and only if they reach a certain “limit price” specified by an investor. With limit orders, an investor also specifies a timeframe (e.g., by end of day, by end of week, until canceled, etc.) after which the order expires if the stock in question has not reached the limit price.
A limit buy order instructs a broker to buy shares on an investor’s behalf if they fall below (or rise above) a certain price threshold before the order expires. Similarly, a limit sell order instructs a broker to sell shares on an investor’s behalf if they fall below (or rise above) a certain price threshold before the order expires.
It’s important to note that limit orders only execute at the specified limit price or better. There is no risk of a limit order executing at an unfavorable market price due to a sudden change in supply or demand.
For instance, if Stock A was trading at $150, and an investor wanted to buy it if it dropped to $140, they might make a limit buy order with a price of $140 that remained valid for two weeks. If stock A dipped below $140 during those two weeks, this trade would execute. If it didn’t fall to the limit price in that timeframe, the order would expire.
Stop Orders
Stop orders are very similar to limit orders but with one important difference—once the specified stop price is reached, the order becomes a market order and executes at the current market price regardless of supply and demand.
While limit orders execute only at a specified price or better, stop orders are triggered if a stock passes a specific price, whether that price is still available or not. For this reason, a stop order can sometimes execute at a less favorable price than the stop price specified by an investor.
Whereas limit orders are used to take advantage of opportunities that may arise while an investor is away from their phone or computer, stop orders are used to automatically lock in gains or minimize losses if certain price changes occur.
