RiskPicksWhat is a Market Order?
A market order is an instruction to buy or sell a stock immediately at the best available price. You are guaranteed to get filled, but the price you pay may differ from the price you see on screen. This difference is called slippage.
How market orders move the price
Every stock has a stack of resting orders at different prices (the order book). When you place a market buy order, it eats through the available sell orders starting at the lowest ask price and working up. If your order is larger than what is available at the best ask, it fills the rest at the next price up, and the next, and so on.
- Small order on a liquid stock: if you buy 100 shares of AAPL, you fill at the best ask and the price does not move. There are millions of shares available
- Large order on a liquid stock: if a fund market-buys 500,000 shares of AAPL, it eats through multiple price levels and pushes the price up as it fills
- Any order on an illiquid stock: if a penny stock has only 200 shares offered at $2.00 and you market-buy 1,000 shares, you fill 200 at $2.00, then whatever is at $2.05, $2.10, and so on. Your average price could be much higher than the quote you saw
When to use market orders
- Exiting a losing trade: when your stop is hit and you need out immediately, a market order guarantees the exit
- Highly liquid stocks: on stocks like AAPL, SPY, or TSLA, the spread is one cent and slippage is minimal
- Momentum entries: when a stock is breaking out and you do not want to miss the move, a market order gets you in
When to avoid market orders
- Low volume stocks: wide spreads and thin order books mean you could pay significantly more than the displayed price
- Pre-market and after-hours: liquidity is lower outside regular hours, making slippage worse. Many brokers require limit orders during extended hours
- During halts: when a stock reopens from a halt, the price can gap significantly. A market order placed during the halt fills at whatever the reopening price is
Every market order is a trade with someone else's limit order. When you hit "buy at market," you are paying whatever price someone else set. On liquid stocks this is fine. On thin stocks, you are at the mercy of whoever is selling.