Individual investors—i.e., most people—typically use market orders for stocks and other securities. Market orders are sort of like paying retail, in that there’s no haggling and the full price is paid. Market orders offer speed—getting the transaction done quickly—but can come with some price uncertainty.
What is a market order?
A market order is an order to buy or sell a security at the going market price. It is the simplest and most common type of order used in financial markets because it’s the quickest to be fulfilled, usually at a price close to what investors expected.
Most stocks with market valuations of at least $10 billion and large exchange-traded funds are easily bought and sold, which can make a market order convenient to use.
Real world example of a market order
An investor wants to buy 50 shares of Oracle Corp., the big provider of corporate-database software. They give their broker a market order at 2 p.m., when US markets are open and Oracle’s stock price is $86, lower than the $87 closing price a day earlier. The broker is able to execute the trade in a few minutes, at a price of $86.25.
Market orders vs. limit orders vs. stop orders
Other types of orders include:
- Limit orders. With these, investors set a price limit for brokers. A buy limit order, for example, would be: Buy 100 shares of ABC Corp., but pay no more than $12 a share. A sell limit order would be: Sell 100 shares of XYZ Inc., but for no less than $12 a share.
- Stop orders. In this case, investors tell brokers to buy or sell only when the market price reaches a specific threshold. A buy stop order, for example, would instruct brokers: Buy ABC once the price reaches $12, or higher. A sell stop order would be: Sell XYZ if the price falls to $12, or lower.
Limit and stop orders give investors control over price when buying or selling. The risk in using these orders is that they won’t be fulfilled if the limit price or stop price isn’t reached. In the ABC example, a $12 buy limit order wouldn’t be filled if the shares trade higher than $12. And in the XYZ example, a $12 sell stop order wouldn’t be filled if the price doesn’t drop to $12 or lower.
When to place a market order
Investors will generally choose a market order if their main concern is to trade quickly—if buying, to get the shares, or if selling, to dispose of them. For example, a market order for ABC would allow brokers to buy at $12.25, say, or sell at $11.75—whatever the going price is at that moment. It gives brokers some latitude in trading, in order to achieve the purchase or sale for investors. Because it’s easiest for brokers to fulfill, a market order typically costs the investor little or nothing in brokerage fees.
A market order usually works better if the stock is highly liquid, meaning lots of shares are outstanding and trade frequently, and the bid-ask spread is narrow. A bid-ask spread is the difference between the price brokers would pay to buy a share (the bid price) and how much they would charge (the ask price) to sell it. The bid-ask spread is one way brokers make money—by being middlemen, or market-makers—in transactions; the cost is minor to investors, especially for small transactions of fewer than 100 shares.
Some very large and well-known companies can have fluctuating bid-ask spreads, and investors might consider a limit order instead of a market order if they want to trade. Amazon, trading at about $3,460 in mid-September, had a bid-ask spread that swung from less than $1 to several dollars. Google’s parent company, Alphabet, also had a similar swing in bid-ask spread on a stock price of about $2,800, for the non-voting shares.
The bottom line
Market orders are typically used by smaller investors and focus on the following:
- Speed and completion of the purchase or sale, which matter more than a price
- Stocks with large market capitalizations and high liquidity
- Stocks whose bid-ask spread is narrow, typically a few cents a share
- Smaller transactions of fewer than 100 shares