Market Order Definition, Types & Examples

What is a Market Order?

A market order is an order type used to buy or sell a specific security at the best available current market price. When a market order is placed, it is executed immediately by the broker against the next available counter-party without any price constraints. This ensures a high likelihood of order execution but at a potentially unfavorable price, especially in fast-moving markets. Market orders are in contrast to limit orders, which set a specific price threshold.

How Market Orders Work

When you place a market order, your broker routes it to the market maker responsible for that security. The market maker matches it with an offsetting order from a seller (for a buy order) or buyer (for a sell order) at the next available market price. This price can differ from the last traded price due to changing prices and liquidity. Market orders execute immediately during normal market hours, filling completely or partially depending on available volume.

Market Order vs Limit Order

Unlike a limit order, which allows you to control the price, a market order provides no price protection and executes at the next available market price. Limit orders may not execute, but allow you to avoid unfavorable prices. Market orders can result in slippage from the last traded price, especially in illiquid or volatile conditions when prices can move significantly between trades.

Pros and Cons of Market Orders

The main advantage of market orders is a very high likelihood of getting an execution. They are easy to use and ensure an immediate fill. However, the downside is no control over the execution price, which can deviate significantly from recent prices, especially in illiquid or volatile markets, resulting in unfavorable entries or exits.

Risks of Market Orders

One key risk of market orders is the lack of price control, which can translate into unexpected losses or smaller gains than anticipated if the execution price deviates too much from expected levels. There is also the risk of partial fills if there is insufficient volume available at the current market price. The SEC warns that market orders carry inherent uncertainty about the execution price, especially during volatile market conditions.

Examples of Market Orders

For example, if the last traded price of XYZ stock was $25, a market buy order could execute at $25.05 if there is high buy-side demand. Similarly, a market sell order may execute at $24.95 if there is more sell-side pressure. So, the actual execution price can differ from the last traded price based on current supply and demand dynamics.

Executing Market Orders

Brokers handle the execution of market orders by immediately routing them to market makers and exchanges. Well-established exchanges prioritize price/time priority principles to determine the order flow that trades first. Larger orders may be split across multiple market makers to find enough liquidity. Smaller retail orders are typically executed by internalizing brokers against their own inventory.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.