Market Order: What It Is & How It Works

Updated: May 19, 2022Written By: Michelle JonesReviewed By:

A market order is an order to buy or sell an asset at whatever the best available transaction price is on the market. It's the most basic type of order. A market order to buy shares should execute immediately, within market hours, as long as there are sell orders that can cover the number of shares requested to be purchased. A market order to sell shares should also execute immediately as long as there are enough buy orders to cover the number of shares requested to be sold.

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What Is a Market Order?

A market order is an order to buy or sell an asset immediately, which means it usually guarantees execution but does not guarantee any specific price. Investors who place a market order want to buy or sell an asset as soon as possible at whatever the best possible transaction price is.

Difference Between a Market Order & Limit Order

Market orders contrast from limit orders, which are orders to buy or sell an asset only at the price set in the order or better. A limit order may not be executed at all, but if it is the trade will occur at the limit price or better. For a limit order to purchase a security this means trade execution at or below the limit price, while for a limit order to sell a security the trade execution is at or above the limit price.

Market orders work well when buying or selling assets with plenty of liquidity, such as large-cap stocks or popular exchange-traded funds (ETFs). However, for securities that are illiquid and/or have wide bid-ask spreads, a market order may not be ideal because trades may occur at a less competitive price. Limit orders may be preferable for these types of securities, even if an investor thinks the current market price is fair.

Tip: A market order usually guarantees execution at the best available transaction price.

How a Market Order Works

A market order is usually the default setting for most brokerages, so when investors enter an order, the order type is "market." By choosing "market order" investors are indicating that they are willing to buy or sell for whatever the best available transaction price is.

Market orders allow investors to buy or sell a security as quickly as possible. This order type works well with securities with plenty of trading action because it almost guarantees execution near the latest market price. In most cases, the security price probably won't change much between when the order was placed and when it is executed, but on some occasions it could.

Market orders tend to be placed as day orders, meaning the order would expire at the end of the day in the unlikely scenario that it goes unfilled. Technically market orders can be placed as 'good til canceled' (GTC), or to expire at a later specific date, but it's quite unlikely that a market order will not fill during the same trading session in which the order was placed. Some brokers allow "market on close" orders, which means the order will be filled in the last minute of the regular trading session.

In the case of a highly liquid security, market orders are usually filled immediately at a price close to the last traded price.

Market Order Example

Let's say Investor A wants to buy 1,000 shares of Acme Corporation and believes the recent trading price is fair. Let's assume the recent price is $9.00 per share. Let's also assume that Investor B is willing to sell 600 shares of Acme at $9.01, and that Investor C is willing to sell 1,000 shares of Acme at $9.02.

  • Investor A: Buy 1,000 shares at $9.00/share
  • Investor B: Sell 600 shares at $9.01/share
  • Investor C: Sell 1,000 at $9.02/share

If Investor A places a market order to buy 1,000 shares of Acme, there's a good chance that 600 shares will transact at $9.01 (Investor B's shares), leaving 400 shares outstanding which will transact at $9.03 (a portion of Investor C's shares).

It's possible that the execution prices turn out to be different for various reasons. It's possible that another buyer purchases Investor B's shares on offer before Investor A's order gets through, or that Investor B cancels their order. In such case, Investor A may purchase all 1,000 shares from Investor C at a price of $9.03.

On the other hand, it's also possible that new sellers enter the market for Acme shares just as Investor A is submitting their order, and that the transaction occurs at a price of $9.00 or possibly lower.

Pros & Cons of Market Orders

Pros of a Market Orders

  • Generally fast and efficient: They're usually executed immediately.
  • Guarantee execution in the case of a security with plenty of trading action.
  • Is the cheapest order to place, with some brokers.

Cons of a Market Orders

  • No guaranteed price: They do not guarantee a maximum or minimum transaction price, so in the case of a volatile security, investors may pay a lot more or sell for a lot less than they expected.
  • Can take time to fill: In the case of thinly traded securities, it might take a broker a long time to fill the market order. Sometimes brokers will take some time to "work" a market order to achieve an execution at a good price.

Important: Quite often an investor's market order will be filled at the bid price (for sells) or ask price (for buys) they see when they place an order for a particular security. However, it's possible that other trade orders are cancelled, or that other orders hit the market first, resulting in the transaction being filled at a different price than anticipated.

Bottom Line

A market order is the most basic type of order when buying or selling securities. It is the default option for most brokerages, but it isn't always the best kind of order to use. Market orders usually work well with securities that are actively traded and stable in price.

This article was written by

Michelle Jones profile picture
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Michelle Jones is editor-in-chief for ValueWalk.com and a daily contributor for ValueWalkPremium.com and has been with the sites since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She lives in the Chicago area with her son, dog and two cats.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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