Market Order : Definition and Understanding

Market OrderMarket Order Definition

A market order is an order to buy or sell a stock at the best available price.A market order is usually executed instantly. The price of the market order is not guaranteed because the market is constantly moving every second. When you execute a market order, the price may be different from the last quote price of the stock. Volatility or average “movement” of a stock is a factor is the price your market order is executed. In very active markets, when volatility is high, your market order confirmation price, will usually be different from the last real time quote you received. Market Orders are the most basic form of stock order. Most of the time a market order is the standard for making a trade.

Other Types of Orders:

Limit Order

Stop Loss Order

When To Buy Stocks

Advanced Trading Strategies

Market Order Explanation:

If you decide to buy shares of stock at the market price, you order will be executed roughly around the ask price. The stock market’s constant motion makes it hard to tell you “exactly” what price you will be getting. The formal definition of market order states,  the price you get is not “guaranteed”. This may be misunderstood by many as a dangerous situation, but that is hardly the case. If only a few seconds pass between the time you look at the last quote and enter the order with your broker, the price has already changed. Using a market order is simple and usually is executed right away.

Thoughts On Market Orders:

There often is a misconception that one should always use a limit order. That is not the case. As a general rule of thumb, your holding period for a stock dictates the use of type of order. Longer term holders like investors, and trend traders, are perfectly fine using market orders. The reason being that in the longer term, price and capital gains are so much greater relative to entry price. The longer term investor or trader, isn’t concerned with a few cents on the spread.

Shorter term traders, don’t use market orders. Day traders, swing traders, and scalpers are working with smaller increments of movements in the stock market to make a profit. In this situation, using a market order can mean the difference between a profit and a loss for some trades. These are generalizations. The stock market has infinite possibilities, and situations differ. The key thing to remember when using market orders is volatility, and understanding what price your are most likely to be executed at, with risk management and position sizing relative to a technical selling point. There are situations where you might what to use a limit order instead. Read Limit Order Definition.

Breakout Theory and Market Orders

Breakout Theory’s risk reward profile is such that market orders are typically used. The breakout strategy seeks to capture the largest trends in the market, which negates the need to consider entry price fluctuation. The competitive end lies in the possible trend that may develop. Volatility is considered when sizing the position of the stock trade, enabling a controlled risk factor of 2% or less. When trading breakouts, the markets begin a rise in volatility as time passes, thus making a trade later that sooner, will most likely result in a more expensive trade. It’s best just to jump strait in with a market order that will most likely execute immediately.


 Related Articles

Market Order Vs Limit Order Deciding what type
 of order to use. Situations vary.
When To Use A Limit Order Recognize when to
 use a limit order. Some market conditions volatile.
 Get the best pricing.

Previous post:

Next post: