Market order

You can explain what a market order does, why its price is not fixed in advance, and when it is a poor choice.

The simplest button

Every trading app has a big button that says buy or sell. In most apps, the default behind it is a market order. It is the fastest way to trade, and for many small trades in large, liquid stocks it works fine.

But a market order has one catch that every trader needs to understand before pressing that button: it fixes when you trade, not at what price.

Now, at the best price

A market order is an instruction to buy or sell right away at the best price currently available. There is no price on the order itself.

A market buy is filled against the lowest ask in the order book.
A market sell is filled against the highest bid.
If the order is larger than the amount waiting at the best price, the rest is filled at the next prices, one level after another.

That makes a market order very likely to be filled, and quickly. What it gives up is control over the price. The SEC stresses that the last traded price is not necessarily the price a market order gets, because it depends on the orders actually available when it arrives. Its example: a market order for 1,000 shares with the best offer at 3.00 might fill 500 shares at 3.00 and the other 500 at a higher price.

Timing matters too. A market order placed while the exchange is closed usually waits until trading opens. It is then filled at whatever price is available at the open, which can be far from the previous close, as you saw with gaps.

Market orders are a reasonable choice when speed matters more than a few cents, and the market is deep: large stocks or major ETFs during regular hours.

Same button, two results

Liquid stock. You buy 50 shares with the best ask at 100.02. All 50 are filled at 100.02 within a fraction of a second.
Thin stock. You buy 1,000 shares of a small company. The app shows 10.20. Only part of your order is waiting at 10.20. The rest is filled at 10.45.

If 400 shares filled at 10.20 and 600 at 10.45, the average price is 10.35, about 1.5% above the quote. Nothing went wrong. The order did exactly what a market order does. A limit order at 10.20 would have bought only what was available at that price.

Common mistakes

"The price on the screen is my price." It is the best price for a limited amount, at that moment.
Placing market orders while the market is closed. The order waits and fills at the opening price.
Using market orders in thin or hectic markets. That is where slippage is largest.
Using market orders without checking the spread. If the spread is wide, you pay all of it at once.
Assuming every app works the same way. Some brokers turn large market orders into protected orders or limit orders. Read your broker's order description.

The takeaway

A market order trades now at the best available price. You get speed and give up control over the price, so use it where the book is deep.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap where a small market buy order is filled.

Tap the chart.

A market buy is filled against the lowest ask first. A market sell would be filled against the highest bid.
2What does a market order fix in advance?

A market order is about speed. The SEC notes that its execution price can differ from the last traded price and the quote you saw.
3In which situation is a market order most likely to fill far from the quote?

Large size, few waiting orders and fast prices all push a market order further through the book.
4You place a market order on a weekend, when the exchange is closed. What usually happens?

A market order placed while the market is closed waits for the open, and the opening price may be far from Friday's close.

of 4 correct.