Essentially we have two important type of orders in order to buy and sell stocks, the first one is “Market Orders” and the second one is “Limit order”.
Market order gives you whatever price is available in the stock exchange for a stock at the time of execution. If you place a request to buy 100 shares of XYZ limited without specifying a price, then the system will automatically take the current trading value and execute it. This type of instruction to buy or sell a security is known as a market order. It guarantees execution but not the price.
A market order to buy means your instruction to your broker is “Buy me at any price! Now!”, similarly, for sale order the instruction is “Sell me at any price!Now!”.
The biggest advantages of a market order is that it gets executed faster than the limit order. However, at the time of executing, you will never know the value at which the stock will be bought or sold.
If a market order didn’t get executed on the same day, then it gets expired at the end of the day.
A market buy order can get executed at a much higher value than the present quoted price. This means, it gives you the highest price that is available from those willing to sell to you.
Similarly, a market order for selling a stock can get executed at a lower value than the present market value. This means, the system gives you the lowest price that is available from those willing to buy from you.
If you are expecting a large price deviation in shares of a particular company, then it’s better to go for limit order.
How price gets executed in a market order
All the pending buying and selling instructions of a stock for a particular trading day gets arranged based on the quoted price. The one with the highest ask price sits at the top of the list.
When you place a market order to purchase a stock, it goes to the top of the list and take the highest value to execute it. Similarly if you place a market order to sell a stock, it goes for the best value i.e. the lowest price in the list and gets executed for you.
Please note, market order will not necessarily be executed at the last traded value of a stock. It can be lower or higher than the last trading value based on the availability of buyer and seller.
For instance, a trader might place a market order when the current trading value is Rs 50 per share, but it’s not guaranteed that it will be filled at Rs 50. The reason is, in the stock market, buying and selling requests are processed as they received by the broker. Before processing your buying or selling instructions, the system will automatically process all other pending requests received before you. By the time, system reaches your quoted price, if the available value is Rs 52, then you will end up getting your stock at Rs 52. If the stock has moved downwards to Rs 48, then you will get it at Rs 48 per share.
Suppose you placed a market order to buy 100 shares of XYZ limited. At this particular time, you have the following three pending selling instructions from different persons who wants to sell 100 stocks of XYZ limited;
In this case, the system takes the price as 252.50 and get you 100 shares of XYZ limited.
In our above case, if you want to sell 100 stocks of XYZ limited and you have above four buying options in the list then system will take the price as Rs 248.50 per share to sell your stocks.
Instead of buying at market value, if you want to buy or sell a security at a specified price, then you can use limit order. If you are using it to buy stocks, then the security will be purchased at or below the specified price. Similarly, if you are using it to sell a security, then it gets executed at or above the specified price. For example a buy limit order for XYZ limited at Rs 400 per share will get executed only when the value of the stock is Rs 400 or less. If you have placed a sell limit order for XYZ limited at Rs 400 per share, it will get executed only when the value of the stock is at Rs 400 per share or more.
The only problem with a market order is slippage, which is possible when you get in and out of a trade. Slippage is when you get a different price than expected on an entry or exit from a trade.