Market Order

A market order is an order to buy or sell a security at the price currently available in the market. The Securities and Exchange Commission's investor education describes it as "an order to buy or sell a stock at the current market price," and then adds the sentence that gives this page its reason to exist: "Unless you specify otherwise, your broker will enter your order as a market order."

That default is the whole subject. Order type is not a topic most people arrive at deliberately, so the practical situation is that an investor who has never thought about it has been choosing one every time, and has been choosing the one that accepts whatever price the market offers. The SEC sets out the trade-off directly. The advantage is that "as long as there are willing buyers and sellers, you are almost always guaranteed your order will be executed." The disadvantage is that "the price you pay when your order is executed may not be the price you expected."

The price on the screen is not the price you are agreeing to. A quoted price is a report of where the security recently traded or where someone is currently willing to deal. A market order is an instruction to trade at whatever is available when the order arrives, which is a moment later and can be a different number. Nothing has gone wrong when those differ. The order was an instruction about speed rather than about price, and it was carried out.

There are two separate reasons the executed price can differ, and they behave differently. The first is the spread, the standing gap between what buyers are offering and what sellers are asking, which means a buyer and a seller trading at the same instant get slightly different prices. That gap is a cost of trading and it is present on every trade regardless of order type. The second is movement, the price changing between the moment you press the button and the moment the order is filled. The spread is predictable and can be seen in advance; movement is not, and it is largest precisely when the market is unsettled.

Which is why the conditions that prompt trading are the conditions in which a market order costs most. Three recur. A thinly traded security has fewer resting orders, so a modest order can reach prices well away from the last quote. The opening and closing minutes of a session concentrate order flow and can produce prices that settle down shortly afterward. And news, by construction, arrives at a moment when the previous quote has stopped describing anything. Our page on exchange-traded funds sets out the practical response for fund trades, which is to use limit orders and avoid the first and last minutes, and there is no reason to restate it here.

The instruction is about urgency, so the honest question is whether you are actually in a hurry. A market order is the right instrument when the trade needs to happen and a few cents either way is immaterial, which describes a great many ordinary purchases of broad, heavily traded funds. It is the wrong instrument when the security is illiquid, the order is large relative to normal volume, or the price matters more than the timing. The choice is not a matter of sophistication. It is a matter of which of the two risks would actually bother you.

A second default hides behind the first. The SEC notes separately that unless an investor specifies a time frame for expiration, orders to buy and sell a stock are day orders, good only during that trading day. A market order is normally filled immediately so the duration rarely comes up, but the same button that assumes urgency about price also assumes a decision about time, and both were made by the platform rather than by the investor.

You enter a quantity and a side. The broker routes the order to a trading venue, and it is matched against the best available orders on the other side until the quantity is filled. The confirmation shows the price you actually got, which is the first time the number is known.

A hypothetical illustration of the difference between the screen and the fill. Amara sees a stock quoted at $30.00 and enters a market order for 200 shares, expecting to spend $6,000. The order is filled at $30.06, so she spends $6,012, or $12 more than the screen suggested. On a purchase she intends to hold for years, twelve dollars is not a reason to do anything differently.

Now the same order in a security that trades a few thousand shares a day. The quote is $30.00, but only 50 shares are offered at that price, 50 more at $30.40, and the remaining 100 only at $31.10. The three pieces cost $1,500, $1,520 and $3,110, so the 200 shares cost $6,130 at an average of $30.65, about 2.2% more than the quote implied. Nothing malfunctioned. The order asked for immediacy and immediacy was the expensive thing to want. All figures are illustrative.

Pros

• The trade gets done, which the SEC frames as almost guaranteed so long as there are willing buyers and sellers.
• There is nothing to monitor afterward and no unfilled order to remember.
• For a broad, heavily traded fund or stock the difference between the quote and the fill is usually trivial relative to the size of the decision.
• It removes the risk that a price-conscious order sits unfilled while the market moves away, which is the mirror-image cost of a limit order.

Cons

• You learn the price after agreeing to it, which is the opposite of how almost every other purchase works.
• In a thin security or a fast market the executed price can be materially worse than the quote that prompted the order.
• It is the default, so it is the order type most often used by the people least aware they are using it.
• Order size interacts with it. A large order can reach progressively worse prices as it fills, and the quote gives no warning of that.