Market orders

Investors must specify how a trade should be executed when they place an order to buy or sell a security. This unit covers four order types:

• Market orders
• Limit orders
• Stop orders
• Stop limit orders

Market orders are the focus of this chapter. They’re commonly used when an investor wants an immediate execution. A market order doesn’t include a specific price; instead, it executes at the next available market price. In practice, market orders often fill within a few seconds of being placed.

When you place a market order, execution is guaranteed - the trade will occur. However, the price is not guaranteed. That creates risk, especially if you place the order when the market is closed.

For example, suppose an investor places a market order to buy stock in a pharmaceutical company after the market closes, when the stock is trading at $50. A few hours later, a news article reports that the company has cured cancer, and the stock price jumps to open at $200 the next day. If the investor’s order is still active at the market open, they’ll buy at around $200 - about 4× more than they likely expected. While extreme moves like this are uncommon, overnight price changes are common.

The risk works in the other direction, too. Using the same $50 stock, a customer who places a market order to sell after the market closes could end up selling at a much lower price if the stock drops overnight. That’s why investors generally avoid placing market orders overnight.

When an order is placed, customers must also specify how long the order remains in effect. In general, orders are either day orders or good-til-canceled (GTC) orders:

Day orders are canceled at the end of the trading day if they haven’t executed.

GTC orders remain active until the customer cancels them, which could be days, weeks, or months.

Because market orders are intended to execute immediately, broker-dealers typically default market orders to day orders.

Here’s a video that dives further into market orders: