Mastering the Order Types: Market Orders

May 17, 2023
Learn about the characteristics, risks, and advantages of market orders.

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.

Market order

A market order, the most basic and common order type, is an order to either sell a security at the marketplace's current best available bid price or buy a security at the current best available ask price. Note that the last trade price has no influence on a market order's execution. The best available bid or ask, once the order reaches its turn for execution, determines the execution 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 establish or exit a position outweighs the desire to control the execution price.

Market order risks

It's important to understand the factors that affect execution of a market order.

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 standard market session opens. It's especially risky to enter market orders outside of the standard market session. A lot can happen overnight or between sessions. A market order that's set-up in the evening and executed at the next standard session's opening bid or ask price, may be drastically different from the price that was anticipated the night before. Schwab does not allow market orders to be placed for 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," you may receive different execution prices for parts of the order, especially for orders where the number of shares you want to buy or sell is relatively large when compared to the number of shares available on the bid or ask. 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 depth of the marketplace and the next best available price.

Sometimes individual transactions "wipe out the bid or ask" that was being quoted. Quoted market prices—meaning the bids and asks that are being displayed—change as trading takes place or as market participants change or cancel their bids and offers due to news coming out or changing market conditions or outlook. Large orders can impact the marketplace. When there are not enough shares available for purchase or sale at the current price, the bid and/or ask will change to reflect the updated marketplace of buyers and sellers. In some cases, if a market order is for a large quantity of shares—greater than the available shares posted at the best bid or ask—then the subsequent execution prices may differ greatly from the initial execution price.

No market for the security – A market order cannot execute when no bid or ask exists. If you want to sell 100 shares of a stock, but there are currently no bids to buy, your order will not execute. Likewise, if you entered an order to buy but no offers were made to sell shares, the buy 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 that's no longer available for trading.

What's next?

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 price. You should understand how market hours, liquidity, and market speed can affect the execution and pricing of a market order.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

Investing involves risk, including loss of principal.

Due to limited liquidity in Extended Hours Trading sessions, there are no assurances that an investor's stock order will be executed. Extended Hours Trading may not be suitable for all investors and poses certain risks. These risks include, but are not limited to, lower liquidity, higher volatility and wider spreads. To learn more call 1-800-435-4000.