When you’re ready to buy or sell a stock, you must place an order with your broker. A market order is the most basic type of order, and it simply instructs your broker to buy or sell a security at the best price. Market orders are executed immediately and provide the investor with the least price protection. Here’s what you need to know about market orders and how they can be used in day trading.
What Is a Market Order?
A market order is an order to buy or sell a security at the best available price. When you place a market order, you’re instructing your broker to buy or sell the security as quickly as possible.
For example, let’s say you want to buy 100 shares of XYZ company, and the current market price for XYZ stock is $10 per share.
When you place a market order, your broker will buy the shares at $10 each and fill your order as soon as possible.
If you wanted to sell 100 shares of XYZ stock you owned, the current market price is $10 per share. When you place a market order to sell, your broker will sell the shares at $10 each and fill your order as soon as possible.
Your broker will always try to get you the best possible price. Still, there’s no guarantee with a market order because the stock might start trading at a lower price when your order is filled. This is why market orders are considered risky for day traders. The timing of your trade could cause you to miss out on profits or even incur losses if the stock price moves adversely.
Here’s What Day Traders Need to Know:
- Market orders are executed immediately at the best available price. This means you may not get the price you want for your trade.
- Market orders are often used when time is of the essence, such as when taking advantage of a sudden price move.
- Note: market orders do not guarantee execution. In very volatile markets, your order may not be filled at all.
- If you place a market order to buy, your broker will buy the security at whatever price is currently being offered by sellers in the market.
- If you place a market order to sell, your broker will sell the security at whatever price is currently offered by buyers.
There are two types of market orders:
1) An unrestricted market order gives your broker complete discretion on when and at what price to execute your trade. Unrestricted market orders are usually filled within minutes but can take longer, depending on market conditions.
2) A restricted market allows day traders some control over when their trade is executed but not necessarily the price.
For example, you might place a day-only restriction, meaning that your trade must be executed during regular trading hours on the same day you placed the order.
Alternatively, you might place an IOC (immediate-or-cancel) restriction, which means that all or part of your order must be filled immediately; any portion of the order that can’t be filled immediately will be canceled automatically.
Generally speaking, market orders receive priority over other types of orders (such as limit orders) because they provide liquidity to the market.
Now that you know what a market order is, you’re ready to place your first trade! Just remember that market orders are subject to fluctuations in the stock price, so they may not always be executed at the price you want. However, suppose you understand how they work and use them wisely. In that case, market orders can be a valuable tool in day trading.