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Pros & Cons of a “Market Order” on the Stock Market

September 29th, 2015

Hey it’s Sasha Evdakov and welcome to Tradersfly.com where I share with you some insight about trading and investing on the stock market.

This week I want to share with you the Pros and Cons of a market order now if you're looking to trade in the stock market, need to understand the different order types. First off before we get into the pros and cons of a market order you need to understand what is a market order and basically you have two different order types you have a market order and you have a limit order.

The limit order allows you to specify what price you want to purchase a certain stock for so for example a stock is trading at $30 and then you want to purchase it at $22 the limit order allows you to specify that you want to purchase it at that $22.

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The market order on the other hand says I want that stock and I'm willing to pay whatever the price is in order to get that stock so if you've ever been to a fancy restaurant or at least a specialty restaurant where sometimes things are not as abundant for example fish sometimes you will notice on the menu that it says market price so you'll pay for let's say grouper sandwich the market price for what it currently is.

Now even though you may have paid for that same grouper sandwich last week twenty dollars this week that market price might be much higher it might be $100 so in theory if you don't ask what the market price is you may be paying exuberant prices for that grouper sandwich. Now this is probably and typically not realistic but it can happen so always ask for what the market price is at least if you’re in a restaurant.

Unfortunately in the stock market things are a little bit different you don't really get to ask hey what's the market price you get to see what the trading prices or what the current prices or what orders have been filled at what price recently but you don't get to ask really “hey what's the market price?” because there's other data showing you at what price range the orders are going off in now if you have a really liquid market meaning there's a lot of shares traded there's a lot of activity market orders are typically fine because you'll get it in very quickly at whatever the rate is because there's a lot of trades happening at that time.

However if there's not a lot of trades happening or your trading a really small stocks, stock that doesn't trade a lot of volume or the market is just maybe more on vacation it's a holiday or maybe even a half day from those holiday seasons then you could get into some real trouble.

Really if now you're placing a market order you're going to pay whatever the rate is at that time and there's certain times where a stock may jump in very volatile sessions up to $5 or $20 or $50 all within a blink of an eye because there's nobody there to buy or sell shares especially if you're trading after hours and you're putting in market orders this can become really problematic and it's at that time where you see those stocks spiked up really high or dip really low because people are buying and selling at market prices.

What you really don't want to happen is for a stock that's trading $25 you don't want to be the fool that's paying $50 for that stock after hours because you put in a market order in there was only one other guy to sell you the shares.

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Instead what you want to do is always focus on putting in limit orders however market orders are still really great especially if a stock is exploding to that upside and you need to get into that stock very quickly then you want to play some market order it's because there's activity because you’re time sensitive and if you’re time sensitive on your order you need to get in it right away. It's at that point where market orders are great.

Now unfortunately you still may end up paying slightly higher prices on a market order because you're looking to get in and your time sensitive but if you're in a liquid market it may only be just a little bit if you're in an illiquid market or very light trading volume you may pay exuberant prices so it's a trade-off do you really want to get into that stock very quickly or you’re looking to really look at what price you're paying for that stock.

Personally I always recommend that you go ahead and place limit orders especially if you're new you’re just getting started and you're unsure of what type of order to place always start with a limit order. As you start developing experience and things become a little bit more active for you in trading then market orders may be a good idea at certain specific times.

Again it's a strategy it's because you're time-sensitive you really need to get into the stock or you're just buying a ton of shares that you just don't care what price you're getting into the stock but in general focus on limit orders however market order still can be great at those appropriate times if you definitely want to get into the stock and you're very time sensitive.

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To summarize what are the pros and cons of market orders. Well basically you can get into the stock at any point as long as you're willing to pay the higher prices for those stocks unfortunately because of that you may also pay exuberant prices or unexpected prices if the market is not as liquid so again another downside is if there's an illiquid market you're going to be paying higher prices however you do have a higher chance or higher probability of getting into a stock or a trade or not missing a run to the upside if you place a market order rather than you may miss the stock or the run to the upside if you're placing a limit order if your limit is not so tight to the market price.

In addition if you're looking to purchase a large lot of shares through a limit order sometimes it's very difficult whereas with a market order you can definitely get the amount of shares that you're looking for so long as that you're willing to pay the price and finally if your trading not liquid stocks or not in a liquid market but you still need to execute the trade go ahead place the market order and then you'll get into the trade.

In the end if you're looking to get into the stock, market is not liquid in you really need to get into it and you’re time sensitive market orders are great however if you care more about the price if you're really conscious about your risk then stick to limit orders which is typically the route I always advise for most people.

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Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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