A stock market is a dynamic place; traders place various buy and sell orders to fulfill their requirements. However, the market runs on its own and prioritizes some orders before the others. The automated process goes by computers and follows the rules and regulations. If you go by the market, meaning if you place a market order and agree to pay or take the current market rate, your order would get executed quickly compared to being selective about the process.
Sell by Market Order or Buy by Market Order
Sell by Market order or market order is when a trader buys or sells at the current market rate. These types of orders get executed rapidly and easily. When a bunch of orders is pending, the system would give priority to the top ask price (the lowest price at which sellers agree to sell the stock) and the top bid price (the highest price at which buyers agree to buy the stock or any asset.) As and when the order comes, these orders get filled first. This is what we call sell by market vs buy by market.
How to execute Buy and Sell Orders in the TradeStation platform video is below:
How to execute buy and sell orders in the Metatrader platform video is below:
To simplify it, let’s take an example. Rio is a stock market trader. He wants to buy a stock named ABC and enters the market. The current market price is $10, the Bid price is $10.10, and the Ask price is $10.15. So, $10.10 is the lowest price sellers are willing to sell the stock at, and $10.15 is the highest price buyers are willing to buy the stock at. So, as a trader buying the stock, you are paying the highest market price, and as a seller, you are getting the lowest market price.
What is Slippage Cost?
Market orders are viable only when you want to get a trade executed faster; in standard scenarios, you are advised to avoid market orders as apart from paying the higher price / getting the lowest price; you also have to pay for another charge named as slippage cost.
Slippage cost happens at the time when the market makers change the market spread to get advantages on their market orders and impose a small amount as premium, which is another form of profit for them. In simple words, slippage cost is the difference between the bid and ask spread means the difference in prices when you enter and exit the trade. As a result, there is no surety that you would get the last price as your trade price.
In addition to that, slippage is counted on each share transacted; thus you pay the price that is multiple of the volume traded. This cost is not huge, but for large volumes, it can have some effect.
When to Place a Sell by Market or Buy by Market Order?
As stated earlier, market order should be avoided if possible, and that’s what most investors and traders do. Though there are times when market orders act as a savior, i.e. your trade goes wrong, and now the market is fluctuating against you. In such cases, selling your position at the market rate is a vital thing to do as it would make sure your order gets executed faster. There would be a slippage cost associated with that, but compared to the loss you would make by not selling the stock, that would be minor.
Traders avoid market orders so that they remain in control of the entry and exit rates of their trades, but in many conditions, timing is more important than the price, i.e. you are trading in the most talked stock of the day. There are going to be high fluctuations if the stock is in the news, and it is better to put the emotions aside and get your trade executed faster. You should also note that it’s also better to avoid such stocks, as they can be risky as it can change the direction any time leading you to have considerable profits and even losses.
In most cases, the issue of market orders not getting executed on time is seen less in small size orders, but if the volume is too large, it may get executed in parts and at different rates. Though most traders and investors are least concerned with that and slippage cost as well. But a little cautiousness won’t hurt you.
How to Trade a Buy or Sell by Market Order?
Trading online has made the process very simple and faster. As an online trader, you may have access to your online trading account. In that, you would see various trading options, including the type of orders. Your default trading option is likely to be market order which you can change to custom order any time. But you have to be careful before pressing the trading buttons that this is the type of order you want to place. If the stock you are dealing in is being traded actively, you are better off placing a market order so that it can get filled faster.
Markets are moving faster with the use of the latest technology, but still, it doesn’t give any guarantee that you would get the price you have asked for. If the stock is witnessing a normal trading day, you may get success in getting your desired price executed, but if it’s a hot stock, you have to be willing to bear a little extra cost.
Market orders get traded faster as they get priority in the trading system, though you still have to wait for the preceding market orders to get executed before yours. Market orders placed before your market order would be given the first chance to get traded and in the end would impact the stock rate. The more the orders before you, the more the chances of changes in the stock price and the more the risk you have to deal with.
The Last Thoughts
Market orders are a boon to those who aim to buy or sell stocks on a frequent basis; it would make the process faster. For low activity stocks, it is always better to implement your own strategy and enter your preferred rates. Market orders give priority to time rather than the prices, which adds slippage costs to the traders.
In the end, whichever order type you chose, it should align with your views and trading strategies. With experience and some success and failure, you would learn how to use market orders in your favor and take advantage of them. But till then, be careful as the market can be a fascinating place to get lost in.