What is a Market Order?
A market order is the first kind of order that can be utilized by investors, when trading securities in financial markets. Simply said, the name refers to the fact that the order gets executed at the prevailing market conditions at that moment.
How Does a Market Order Work?
When a market order is inserted, the investor is not specifying the price at which they would like to buy or sell the securities. On the contrary, the order gets executed at the best price that can be found on the markets.
For example, let’s imagine the situation where an investor wants to buy the stock of a company and decides to adopt a market order to conduct the transaction. In this case the chosen brokerage system would start filtering all the available prices on exchange at that moment and would then automatically pick the most favorable.
The Concept of Order Book
By order book we mean an electronic list that is kept by every stock exchange for most assets like stocks, bonds and currencies for example. In this real time register all the buyers and sellers are listed, along with the respective prices they are bidding/offering and the size of their orders. In the top section of the order book usually the highest bid and lowest offer prices are reported. It is thus a very useful tool to analyze how a certain security is trading and making more informed decisions.
Advantages and Disadvantages of a Market Order
While a market order can be ideal for investors seeking speed and guarantee of execution, shortcomings need also to be considered. Especially for thinly traded securities, characterized by low levels of liquidity, using a market order could be risky. A very low liquidity could potentially distort the prices and, for example, sell a security a lot lower than its fair value.
| Execution Price | Price Protection | Guarantee of Trade | |
| Market Order | Trade executed on available market price | No | Yes |