What are Orders: Market Orders (Part 2)
It is recommended that you read What are Orders? (Part 1) to understand the concept/definitions of orders before reading this post.
What is a Market Order ?
This is the fastest order an investor can place to buy or sell a security. When this order is placed, the investor will quickly buy/sell the security for the best possible price that the other investors are offering (If the investor is buying the security, they will buy it for the lowest price that was offered by the owner of the shares AKA the Ask Price. If the investor is selling the security, they will sell it for the highest price that was being offered by another investor AKA the Bid Price). Because of this, Market Orders will always be executed and cannot be cancelled if placed during regular trading hours.
The main purpose of this order is speed, the investor wants to buy/sell the security as fast as possible no matter the price. Unlike other orders the investor does not have a choice on the price that is determined when the security is bought or sold. They will only find out after the order has been executed. In many cases they may find out that they bought/sold the security for more/less than they expected depending on the security’s volatility.
Advantage of Market Orders:
Orders are executed quickly, allowing traders to buy/sell their security without worrying if the order doesn’t go through (as long as there are willing buyers and sellers of that security
Disadvantage of Market Orders:
Prices from trading the security may not be what the trader was expecting (especially if the security’s prices are volatile)
Unlike other orders, Market Orders cannot be modified meaning that the trader’s decision regarding this order will have to be final before doing through with it
Example of a Market Order:
A trader sees a stock listed at a price of $150 per share and wants to buy the share a quickly as possible because he predicts the stock will rise rapidly in value. The ask price for the stock is $153 and the trader places a market order to buy 10 shares. When the order is executed, the trader noticed that he paid $156 for each share instead of the $153 he originally anticipated, therefore he paid an extra $30 to buy these shares ([$156 – $153] X 10 Shares = $30 OR $1,560 – $1,530 = $30). This is an example of a trader receiving a stock for a price that is slightly higher than he anticipated.
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