Using a market order is one way for a trader to gain better control of their order. Understanding what order types are, why and when traders use them, and what factors impact their execution can help you match an order type to your specific trade objectives.
A market order, the most basic and common order type, is an order to either sell a security at the next available bid price or buy a security at the next available ask price. Note that the last trade price has no influence on a market orde's execution. The next available bid or ask, once the order reaches its turn for execution, determines the fill price of a market order. While a market order generally assures an execution under normal market conditions, it does not guarantee a specified price.
When to use market orders
Market orders are day orders, meaning that they remain valid only for the standard trading session in which they were entered (between 9:30 a.m. and 4:00 p.m. ET). Traders cannot use market orders to execute orders during extended-hours sessions, such as pre-market or after-hours sessions. Orders placed outside of the standard market session will be considered for execution at the opening of the next market.
Market order advantages
Market orders are optimal when the primary goal is to execute the trade immediately. A market order is generally appropriate when you think a stock is priced right, when you are sure you want a fill on your order, or when you want an immediate execution.
Traders should consider using market orders when the need to enter or exit a trade outweighs the desire to control the execution price.
Market order risks
Market closure – The timing of a market order is significant. Market orders placed outside of the standard market session will not be considered for execution until the market opens. It's especially risky to enter market orders outside of the standard market session. A lot can happen between sessions, and an order will execute at the next standard session's opening bid or ask price, which may be drastically different from the anticipated price. Schwab does not allow market orders during extended-hours trading.
Fast markets – The speed of movements in price can also affect a market order's execution price. When the market fluctuates, particularly during periods of high trading volume, the price at which your order executes may not be the same as the price you saw while building or submitting your order.
A market order carries the risk of unexpected or unfavorable execution. Also, due to the speed at which market orders are executed, it is almost impossible to cancel a market order once it has been submitted. Make sure to check your order for accuracy before submitting it, as you most likely will not be able to change or cancel it afterward.
Liquidity – When you place an order "at the market," which consists of the best bid and ask price, you may receive different prices for parts of the order, especially for orders where the number of shares is relatively large when compared to the available liquidity. Consider a security's liquidity when evaluating whether to use market orders.
The impact of liquidity on a market order can be particularly significant when trading illiquid securities. It's possible that relatively few outstanding shares may exist, or trading volume may be relatively low. If that's the case, then the last trade price may not necessarily be current as the trade may have occurred minutes or hours ago. Basically, the fewer the shares traded, the greater the impact each transaction can potentially have on the next available price.
Sometimes individual transactions "wipe out the bid or ask" when not enough shares are available for purchase or sale at the current price. In some cases, this occurs because a market order, generally for a large quantity of shares, is greater than the available shares posted at the best bid or ask. Subsequent fill prices may differ greatly from the initial fill price.
No market for the security – A market order cannot execute when no bid or ask exists. If you want to buy 100 shares of a stock, but there are currently no offers to sell, your order will not execute. Likewise, if you entered an order to sell, but no bids were made to purchase shares, the sell order would not execute. Although rare, this scenario is more likely to occur when trading very low-volume, or "thinly traded," stocks.
As with any order type, market orders will not execute if the security itself is not open for trading. This may result from a late opening, a trading halt on the security, or a security no longer available for trade.
Market orders can be a useful tool if your trading priority is immediate execution and you are willing to accept the risk of unexpected and unfavorable execution. You should understand how market hours, liquidity, and market speed can affect the execution and pricing of a market order.