In stock market terms, a market order means any transaction that includes buying or selling of shares.
How Does a Market Order Work?
Let’s take an example of a market order. Say an investor placed a buy order for 10 shares of HDFC bank at Rs 1,050 per share. After placing an order, it goes to the stock exchange; which stock exchange the order goes to depends on which exchange the broker is registered with.
Here is where the buy order is matched with another investor who might be selling HDFC Bank shares. This is a sell order.
After a buy and sell order is matched, the order is executed.
The price at which the order will be executed is decided according to the prevailing market price. In fact, the market price can be different from when the order was placed and when the order is executed by a few rupees because stock markets are volatile and stock prices change every second.
One of the points that need to be kept in mind while placing a market order is that the market price may change by the time your order is actually executed. For smaller orders, it could be a matter of just a few rupees but fluctuations count when the markets are volatile and the orders run into a few lakhs.
Let’s understand this through another market order example.
Consider HDFC Bank’s stock.
Say the stock is trading at Rs 1,080 per share.
An order is placed for 10 shares of the bank
Ideally, the price to be paid should be Rs 10,080 for 10 shares.
Say by the time the order was sent to the exchange and executed, the price increased by Rs 5 per share, to Rs 1,085 per share.
The total amount invested would be Rs 10,850, Rs 50 more than the expected amount in the beginning.
A market order is placed for 100 shares.
Assumed price for the order: Rs 1,08,000. (Since the per-share price while placing the order was Rs 1,080)
To keep the example consistent, let’s again assume that the price of one share increases by Rs 5 till the order is rounded off.
The total investment into the market order will be Rs 1,08,500.
Here there is a difference of Rs 500.
Note: There may be chances that the price does not change at all. It completely depends on the market conditions and the volatility existing in the market at that point in time. However, it is safe to conclude that the extra price that an investor may have to pay increased with an increase in the number of shares he or she wants to buy. Hence the price at which the order is executed, especially in a heavy volume market, may not be the same as the last traded price of the stock.
Pros and Cons of Market Order
If what is market order in clear until now, let’s understand the pros and cons of the concept.
One of the biggest advantages of the market order is that an investor can get into the stock at any given time. It is not required to wait for order completion.
There is almost a 100% chance of an order to get executed. As long as there are buyers and sellers, the order will certainly get executed.
Since there is no binding of at which price the order will be executed, larger orders of shares can be bought very easily and without much trouble.
Market order also makes it easy to buy stocks that may be less liquid. Since market orders are quick, it helps to grab the chance at opportune times to get into a stock which has high growth potential, without having to wait for an entire trading session for the order to be executed.
Cons, as mentioned before, is that an investor may end up paying a higher price than anticipated.
Stock Market Order Types
Apart from a market order, there are other stock market order types as well.
Limit Order: Limit order is a stock market order when the price at which an investor wishes the order to be executed is mentioned.
Stop Loss Order: A stop-loss order is either a buy or a sell order that is placed to limit an investor’s loss after the stock reaches a certain limit. Say a buy order was placed at Rs 100 per share. On the basis of an investor’s choice and extensive research, he or she may not want to hold the stock anymore after it reaches a certain downside, say Rs 90 per share. A stop-loss order of Rs 90 per share can be set, according to which the stock investment will be sold once and if the stock falls to that level.