When you want to buy or sell a stock right now, you use a market order. It is the simplest and most common type of order in stock trading. Let us break down exactly how market orders work and when you should use them.
What is a Market Order?
A market order is an instruction to buy or sell a stock immediately at the best available price. When you place a market order, you are telling your broker to execute the trade as fast as possible, regardless of the exact price.
Think of it like buying concert tickets: You walk up to the ticket window and say "I want two tickets now." You will pay whatever the current price is because you want them immediately. You are prioritizing speed over price.
How Market Orders Work
When you submit a market order, here is what happens behind the scenes:
- Your order goes to the exchange or market maker
- It matches with the best available offer (for buys) or bid (for sells)
- The trade executes almost instantly during market hours
- You receive confirmation of the filled price
The entire process typically takes less than a second for liquid stocks. Your order is filled at the "market price," which is why it is called a market order.
Market Order Example
Example: Buying Apple Stock
You want to buy 100 shares of Apple (AAPL). The current quote shows:
- Bid: $185.50 (what buyers are offering)
- Ask: $185.52 (what sellers want)
You place a market order to buy 100 shares. Your order fills immediately at $185.52 (the ask price). You now own 100 shares and paid $18,552 total.
Advantages of Market Orders
1. Guaranteed Execution
Market orders are virtually guaranteed to execute during market hours. If there is any trading activity in the stock, your order will fill. This is crucial when you need to enter or exit a position quickly.
2. Speed
Market orders are the fastest way to trade. They execute almost instantly, which matters when prices are moving quickly or when you need to react to news.
3. Simplicity
You do not need to guess what price to set. Just click buy or sell and the trade happens. This makes market orders perfect for beginners learning the basics.
4. Works for Urgent Trades
When you absolutely must get in or out of a position, a market order ensures it happens. Stop losses that convert to market orders help protect your capital.
Disadvantages and Risks
1. No Price Control
You do not know the exact price you will pay until the order fills. In fast-moving markets, the fill price can be different from what you expected.
2. Slippage
Slippage is the difference between the expected price and the actual fill price. During volatile conditions, slippage can cost you money.
Slippage Example
A stock is quoted at $50.00. You place a market order to buy. By the time your order reaches the exchange, the price has moved to $50.15. You pay $50.15 instead of $50.00. That $0.15 difference is slippage.
3. Dangerous in Illiquid Stocks
Stocks with low trading volume can have wide bid-ask spreads. A market order might fill at a much worse price than expected. Always check the spread before using market orders on thinly traded stocks.
4. Risky During Pre-Market and After-Hours
Extended hours trading has less liquidity and wider spreads. Market orders can fill at unexpected prices during these sessions.
When to Use Market Orders
- Highly liquid stocks: Blue-chip stocks like Apple, Microsoft, and Amazon have tight spreads
- Urgent exits: When you need to get out of a losing trade immediately
- Small positions: When the exact fill price matters less than execution
- During regular market hours: When liquidity is highest
- Reacting to news: When speed is more important than getting the perfect price
When to Avoid Market Orders
- Low volume stocks: Illiquid stocks can have terrible fills
- Pre-market and after-hours: Limited liquidity leads to bad prices
- During extreme volatility: Prices can move dramatically between order and fill
- Large orders: Big orders can move the market against you
- When price matters: If you have a specific entry or exit price in mind, use a limit order instead
Market Orders vs Limit Orders
The key difference is priority. Market orders prioritize speed and guarantee execution. Limit orders prioritize price but might not execute if the price never reaches your limit.
- Market order: "Buy now at whatever price"
- Limit order: "Buy only at this price or better"
Most traders use a combination of both order types depending on the situation.
Tips for Using Market Orders
- Check the spread first: Look at the bid-ask spread before placing a market order
- Use during market hours: Avoid market orders in pre-market or after-hours
- Start with liquid stocks: Trade popular stocks with high volume
- Size appropriately: Larger orders can cause more slippage
- Review your fills: Check what price you actually got to learn from each trade
Track All Your Trades
Pro Trader Dashboard automatically logs every order you place, including the fill price. See exactly how your market orders perform over time.
Summary
Market orders are the fastest way to buy or sell stocks. They guarantee execution but not price. Use them for liquid stocks during regular market hours when speed matters more than getting the exact price. For more price control, consider using limit orders instead.
Understanding order types is fundamental to successful trading. Learn about stop loss orders to protect your trades or explore market vs limit orders for a deeper comparison.