What is an Inventory Market Order and How Does It Work?
If you’re new to investing, you may have heard someone use the phrase “market order.” One of the most popular forms of orders utilized on the stock market is a market order.
It is a straightforward yet effective instrument that enables quick and easy stock purchases or sales.
We’ll discuss market order in this post, including what is it, how it works, and how you may use it to purchase or sell stocks (or crypto).
What is a Market Order?
In the stock market, a market order is a specific kind of order that is used to purchase or sell equities at the going rate.
You are giving your broker the go-ahead to carry out the transaction at the best price when you place a market order.
In other words, a market order will tell your broker to buy the stock at $50 per share if you desire to acquire it and that is the current market price.
The actual execution price may vary from the first quotation if the market price changes while your order is being executed.
How Does a Market Order Work?
First-come, first-served policy governs the execution of market orders.
This indicates that the exchange will execute the first order it receives before moving on to the next and so on.
Your broker will submit your market order to the exchange where the stock is traded when you place it. The best available ask price (if you’re buying) or bid price (if you’re selling) will then be matched with your order by the exchange.
Following that, the transaction is finished, and your broker will send you a confirmation.
Advantages of Market Orders
Since they are straightforward and simple to use, market orders are a preferred option for investors. Here are a few benefits of utilizing a market order:
- Fast execution: Market orders are carried out instantly, enabling you to purchase or sell
stocks with ease.
- Guaranteed execution: Market orders are guaranteed to be completed since they are carried out at the best price at the time of execution.
- Best price: Market orders are filled at the going market rate, so you’ll get the greatest deal possible on your transaction.
Risks of Market Orders
While market orders offer numerous advantages, they also come with significant hazards. These are a few dangers associated with using a market order:
- No ability to influence execution price: If you make a market order, you have no influence on the price of execution. You can find yourself spending more than you expected because the price might fluctuate suddenly.
- Price slippage: The market price can occasionally change fast, leading to price slippage. As a result, the execution price could differ from the initial quotation in both directions.
- No price protection: Market orders don’t provide any insurance against price swings. Your execution price can be lower than you anticipated if the stock price declines sharply.
Examples of Market Orders
Let’s look at the two primary examples of market orders:
- You would issue a market order to buy 100 shares of XYZ stock if you wanted to purchase them at the current market price.
- You would put in a market order to sell 50 shares of ABC stock if you wanted to sell them at the current market price.
How to Place a Market Order?
You require a brokerage account in order to place a market order. To make a market order once you’ve created an account, adhere to these steps:
- Register for a trading account.
- Go to your account’s “trade” or “order” section.
- The stock you wish to purchase or sell should be chosen.
- The order type you should select is “market order.”
- The quantity of shares you wish to purchase or sell must be entered.
- After checking the order’s specifics, click “submit.”
Your order will then be processed by your broker, who will then carry out the deal at the going rate.
When to Use a Market Order?
The greatest time to utilize market orders is when you need to swiftly purchase or sell a stock and want to be sure that your order is carried out right away.
They are also helpful if you don’t care about the execution price because the stock price is constant.
When the market is unstable or the bid-ask spread is large, market orders should be avoided.
In certain situations, you can find yourself paying more than you planned to or selling for less than you anticipated.
Understanding Bid-Ask Spread
When you place a market order, your broker will carry out your transaction at the best-offered ask price (if you are buying) or bid price (if you are selling).
The bid-ask spread is the price difference between the ask and the bid.
When putting in a market order, the bid-ask spread may be a crucial consideration.
The execution price for buyers may be greater and the execution price for sellers may be lower if the spread is large.
How do Market Orders Affect Stock Prices?
Stock prices can be affected by market orders, particularly when sizable orders are issued.
Depending on the direction of the trade, a market order to buy or sell a lot of shares may cause the stock price to rise or fall.
Alternatives to Market Orders
Market orders come with dangers, but there are other options if you’re not comfortable with them:
- Limit orders: You can specify a certain price at which you wish to
purchase or sell a stock using a limit order.
- Stop orders: Stop orders are used to safeguard gains or restrict
losses by causing a purchase or sell order to be executed when the price of
the stock reaches a particular level.
Market orders are a straightforward and practical approach to quickly and easily purchase or sell stocks.
They come with certain dangers but promise speedy and assured execution. Prior to employing market orders, one should be aware of their hazards and restrictions.
Here are the most popular asked questions about market order:
Q1. Is an inventory market order the best order type for all trading
Perhaps, it might not be the greatest option for investors who wish to make a transaction at a particular time or price.
In certain circumstances, other order types, including limit orders or stop orders, could be preferable.
Q2. How do I place an inventory market order with my broker?
Via your broker’s online trading interface, over the phone, or in person, you may place an IMO.
Q3. Can I cancel an inventory market order after I place it?
No, an IMO cannot be amended or canceled after it has been placed. You must hold off until your broker completes the transaction.
Q4. What happens if there are no buyers or sellers at the time I place my
inventory market order?
Your order might not be filled right away if there are no buyers or sellers in the market when you put it.
Unless a buyer or seller is located for your deal, your broker will keep looking. As a result, there can be a delay or different pricing than what you had planned.
Q5. Can an inventory market order be used for any type of security, such as
bonds or options?
No, an IMO is typically used for buying or selling stocks in the stock market. Other types of securities may require different order types or have different trading rules.
Q6. Are market orders more expensive than other types of orders?
Market orders are executed at the current market price, which means they’re not more expensive than other types of orders.
Q7. What is the difference between a market order and a limit order?
Market orders are executed immediately at the best available price, while limit orders are executed at a specific price or better.