A market order is a basic trade order that instructs the broker to buy or sell at the best available price. Market orders are considered to be the most immediate way to enter or exit a trade and are often executed instantaneously.
Advantages of Market Orders
- Get In or Out of the Market Quickly
A main advantage of using a market order is that the trader is guaranteed to fill the trade. If a trader absolutely needs to get in or out of a trade, a market order is the most urgent order type.
- Fast Execution
Market orders usually execute almost immediately. When instant order execution is a higher priority than execution price, market orders are a preferred approach.
Disadvantages of Market Orders
- No Guarantee of Price
Market orders do not guarantee price and therefore do not allow any precision in order entry.
When using a market order, the trader has no control over the execution price. Although the order is filled at the best available price at the time, the execution price may be much different than the last quoted price before the order is received.
In fact, sometimes market orders are filled across multiple price levels, as the “best available” price can change from moment to moment.
- Liquidity and Slippage
In highly liquid markets, such as Crude Oil futures or an equity such as Microsoft, market sell orders will generally fill at the bid price and market buy orders at the ask price. However, even with highly liquid securities, this is not always the case.
In fast moving markets, market orders can result in slippage, a difference between the price the trader expected and the price where a trade is actually filled. Using market orders exclusively in markets with strong liquidity can help avoid slippage which can be the difference between a winning or losing trade.