Market Orders: Understanding Order types, with Examples

A good place to start sharpening your trading skills is to understand market orders.

Whether it’s market orders, limit orders, or stop orders, each type serves a specific purpose.

This guide will walk you through how to use each effectively, optimizing your trading strategy.

Key takeaways

A market order is a command sent to a broker to buy or sell a security.

Each market order contains key information, such as financial product, direction of the transaction, type of order, quantity, price conditions, or validity period.

Market orders, best-limit orders, limit orders, stop-loss orders, and stop-limit orders are 5 types of market orders, each with specific characteristics.

What is a Market Order?

A market order is a request to buy or sell that investors send to their financial intermediary, the broker. 

This request contains instructions such as: 

  • the financial product requested
  • the direction of the transaction (buy or sell)
  • the order type (market, limit, stop)
  • the desired quantity
  • price conditions (limit, stop-loss, stop-limit)
  • the validity period

Once the market receives requests, they are entered into the order book A detailed list showing all buy and sell orders for a security, organized by price level. It helps traders gauge market depth and identify potential price movements. , which is an interface that matches bids and offers. 

When the purchase conditions for one market order are compatible with the sale conditions of another market order, a transaction takes place.

Noteworthy

The stock market quote for a financial product is the price at which it was last bought or sold on the market, which is not necessarily the current buy or sell price.

A stock market chart shows the history of all market prices over time, i.e., the prices at which market orders were actually bought or sold.

The Different Types of Orders:

Order typeDescription
Market orderBuy or sell only up to a set price; the limit
Best-limit orderBuy or sell only at the best available price
Limit orderBuy or sell only above a set price; the stop
Stop-loss orderYou can buy or sell only above a set first price, the stop, but before a set second price, the limit.
Stop-limit orderBuy or sell only above a set first price, the stop, but before a set second price, the limit.

These market orders can be used to open or close a new position. 

Orders for automatically closing a losing position are referred to as stop-loss orders, while orders for automatically closing a winning position are referred to as take-profit orders.

Market Order

A market order (or order at any price) is a request to buy or sell a financial product immediately, regardless of the market price.

Market orders take precedence over all other market orders. They are executed immediately at the best price available at that moment.

If the market is open, market orders are processed upon receipt. The probability that the requested quantity will be available is very high since price is not an issue. There only needs to be enough shares, derivatives, ETFs, etc., available for purchase or sale.

So, a buyer market order is executed at the best available sales price, and conversely, a seller market order is executed at the best available purchase price.

ProRealTime Web platform order ticket. In this example, the trader is about to buy an LVMH share using a market order at €750. A take-profit order is placed at €825, and a stop-loss order at €675.
Noteworthy

The price range, or bid-ask spread, is the difference between the highest price buyers are willing to pay, the bid, and the lowest price sellers are willing to accept, the ask. The more liquid a market is, the more buyers and sellers there are, and the narrower the spread.

When the market is volatile and moving fast, or when it lacks liquidity How easily and quickly you can buy or sell an asset in the market without changing its price much. More liquidity means easier trading. and few buyers and sellers are available, market orders can be executed at a lower price or even only partially executed!

In fact, market orders have to find an available counterpart to be executed. In other words, the buy order needs a seller for the transaction to occur, and conversely, the sell order needs a buyer. 

However, the last price quote isn’t necessarily the price at which the first counterparty will be available. The most attractive buyer could offer a much lower purchase price, and the most attractive seller, a much higher sales price!

The less liquid the market, the fewer buyers and sellers there are available, and the higher the risk that the best available price might be far off, or high. 

In addition, the most attractive counterpart must be able to take the quantity you’re offering or requesting in your market order!

If the quantity (number of shares, etc.) offered by the first counterparty isn’t enough, the remainder of the market order would require a second available counterparty whose price could be even further off.

Limit Order

A limit order is a request to buy or sell a financial product up to a specific price called the limit.

Limit orders are only executed when a certain price is reached. For a buyer limit order, the purchase only takes place at or below the limit price. Conversely, for a seller limit order, the sale only takes place at or above the limit price.

Limit orders will remain pending in the order book A detailed list showing all buy and sell orders for a security, organized by price level. It helps traders gauge market depth and identify potential price movements. either until they expire, which is the case if price conditions are not met, or until the market moves, finally causing price conditions to be met.

ProRealTime Web platform order ticket. In this example, the trader is about to buy an LVMH share using a limit order at €750. A take-profit order is placed at €825, and a stop-loss order at €675.
Noteworthy

For example, limit orders allow you to take your profits automatically when you reach your price goal. This is referred to as taking profit.

Stop-loss order

A stop-loss order is a request to buy or sell a financial product beyond a specific price called the stop.

Like limit orders, stop orders are only executed once a specific price is reached. At that point, the order automatically becomes a market order, and the price conditions disappear.

Accordingly, a buyer’s stop order automatically transforms into a market order only once the price reaches or exceeds the stop. Conversely, a seller’s stop order automatically transforms into a market order only once the price reaches or falls below the stop.

Such logic may seem counter-intuitive. Why would a buyer want to wait for the price to rise before buying at any price? And why would a seller want to wait for the price to drop before selling at any price?

With stop-loss orders, investors are not seeking to optimize their buy or sell price but are instead betting on price acceleration above a certain stop.

For example, if investors anticipate that a stock crossing its highest historical price could trigger a rapid rise in prices, they could use a buy-stop order.

Conversely, if they anticipate that a stock crossing its lowest historical price could trigger a rapid decline in prices, they could use a stop-loss order.

ProRealTime Web platform order ticket. In this example, the trader is about to buy an LVMH share using a stop-loss order at €750. A take-profit order is placed at €825, and a stop-loss order at €675.
Noteworthy 

Stop orders cause losses to be cut automatically when prices reach a level outside of what you have forecast in your scenario, which is why they are called stop-loss orders.

Stop-limit order

A stop-limit order is a request to buy or sell a financial product beyond a first price, the stop, but before a second price, the limit. It is, in fact, a stop-loss order that turns into a limit order when the stop is reached, as opposed to a market order.

The introduction of stop-limit orders allows investors to better control price execution and prevent the price from declining too much after the stop is crossed. 

On the other hand, they run the risk that their order will not be executed or will only be partially executed if their stop-limit order, which became a limit order upon reaching the stop, does not find a willing counterparty or only finds one with an insufficient quantity.

ProRealTime Web platform order ticket. In this example, the trader is about to buy an LVMH share using a stop-limit order with a stop price of €750 and a limit price of €749.50. A take-profit order is placed at €825, and a stop-loss order at €675.

How do Market Orders Work?

To place a market order, investors need to go to their trading platform’s order interface and fill out an order ticket.

They will select the type of order they wish to place and provide the necessary information, such as the financial product requested, direction of the transaction (purchase or sale), quantity desired, price conditions, and validity period.

Once the investor confirms their market order, it is received by their financial intermediary, the broker, who is in charge of transmitting it to the market. The market order then enters the order book within a few nanoseconds.

If the order meets execution conditions and a counterparty is available, the transaction takes place. Otherwise, the order remains pending until it expires.

Once the order is executed, the investor receives confirmation of the transaction, indicating the number of shares purchased or sold and the execution price. The best trading platforms also provide a summary of the fees (brokerage and exchange).

Noteworthy

Not all market orders are forwarded to a financial center. “Dealing desk” brokers create their own internal market by directly coordinating their customers’ buy and sell orders.

Validity period of a market order

The validity period of a market order can be arbitrarily set by the broker or, in some cases, chosen by investors in their order interface.

Validity periodsDescription
Good for the day (GFD)Valid for the trading day. If it is not executed at the end of the day, it is automatically canceled.
Good ‘til canceled (GTC)Valid until canceled. However, some brokers may impose a maximum validity period of 30 or 90 days.
Good ‘til date (GTD)Valid until a specific date. If it has not been executed by that date, it is automatically canceled.
Immediate or cancel (IOC)Valid only for immediate execution.
Fill or kill (FOK)Valid only for full execution.
At the openingValid only for execution at the opening of the market.
At the closeValid only for execution at the close of the market.
One cancels the other (OCO)Valid only as long as the associated order is not executed. Allows you to place two interdependent orders, where executing one cancels the other.
One triggers the other (OTO)Valid only from the moment the associated order has been successfully executed. This option allows you to place an order conditioned on the execution of another order.
One triggers two (OTT)Valid as long as a first associated order is filled, and then two subsequent orders are automatically submitted at the same time. This option allows you to place two orders conditioned on the execution of a first order.
Noteworthy 

Some markets will not be in the same time zone as you. Be careful. Don’t be fooled by time differences!

Execution risk

Market orders that go either unexecuted or partially executed represent a risk for investors. 

If an order to enter a position is not filled, investors may miss an opportunity. But if an order to exit a position is not filled, the situation is more critical; investors’ latent gains could evaporate, and/or their losses could increase.

Several factors, such as excessively rigid price conditions, price volatility, or lack of market liquidity, can significantly increase the risk of non-execution, especially in the event of price gaps.

Noteworthy

In addition to the type of order and the state of the market, the broker’s execution quality plays a crucial role in maximizing buying and selling transactions. The best brokers will be more conscientious about accurately placing your orders.

Which Market Order should I Use?

No market order is better than another. The choice of order type depends on your goals and market conditions. 

Some orders favor speed and probability of execution, such as market orders and stop orders. Others, such as limit orders, favor control over a transaction’s execution price. Yet others, such as best-limit orders and stop-limit orders, seek a compromise between the two.

Order typesRisk of non-executionPrice control
Market orderNoNo
Best-limit orderYes (partial)Yes (partial)
Limit orderYesYes
Stop-loss orderNoNo
Stop-limit orderYes (partial)Yes (partial)
Noteworthy

In the event of price gaps, market orders, and stop-loss orders may be executed at prices significantly lower than the last market price. Best-limit orders and stop-limit orders are specifically intended to reduce this “slippage risk.”

Market order vs best-limit order

The difference between market orders and best-limit orders is that a best-limit order imposes a price condition. 

Market orders are executed at any price, while best-limit orders are only executed at the available counterparty’s best price at a specific time.

Therefore, best-limit orders carry a risk of non-execution or partial execution, while market orders carry no execution risk at all. On the other hand, best-limit orders provide greater control over the execution price.

Market order vs limit order

The difference between a market order and a limit order is that a limit order imposes a price condition called the limit.

Market orders can be executed at any price, while limit orders can be executed only at the price (limit) set by an investor.

Therefore, limit orders carry a risk of non-execution or partial execution, while market orders carry no execution risk at all. On the other hand, limit orders provide greater control over the execution price.

Market order vs stop-loss order

The difference between market orders and stop-loss orders is that a limit order imposes a price condition called the stop.

Market orders can be executed at any price, while stop-loss orders are only executed beyond the stop price set by an investor.

Therefore, stop-loss orders carry a risk of non-execution in the event the stop is not reached, while market orders carry no execution risk at all.

Because stop-loss orders turn into market orders when the stop is reached, price control is identical for both orders; that is, there is NO price control whatsoever.

Best-limit order vs limit order

The difference between best-limit orders and limit orders is that the boundary of best-limit orders is set by the market, i.e., an available counterparty’s best price, while the boundary of limit orders is set by the investor.

Best-limit orders carry a risk of partial non-execution, while limit orders carry a risk of total non-execution, for example, if the limit is never reached.

On the other hand, limit orders come with greater price control than best-limit orders since the limit is set by the trader and not by the market.

Limit order vs stop-loss order

The difference between limit orders and stop-loss orders is that limit orders are worthwhile at a price that is more attractive to investors than the current market price, the limit, while stop-loss orders are worthwhile beyond a lower price than the current market price for the investor, the stop.

Limit orders allow full control of the execution price, while stop-loss orders do not allow any price control since they become market orders once the stop is reached and, therefore, can be executed at any price.

Best-limit order vs stop-loss order

A best-limit order prioritizes securing the most favorable price at the moment of execution by targeting the best available bid or ask price in the market, becoming a limit order at that level. 

This strategy maximizes price efficiency but may not execute if the desired price isn’t met. In contrast, a stop-loss order prioritizes risk management by triggering a market order when a pre-determined, less favorable price level (the stop price) is reached, potentially sacrificing price control to limit potential losses.

Noteworthy

You can better manage your risk by combining several stock exchange orders, especially ones that automatically place stop-loss orders to cut your losses. In addition, there are more advanced order combinations such as OTT orders, where, if your first order is filled, two subsequent orders are automatically submitted at the same time.

There are many types of market orders and an infinite number of possible combinations. If you want to master the full range of available market orders and avoid mistakes when sending orders, you should practice on a trading simulator.

author
Maxime Parra

Maxime holds two master’s degrees from the SKEMA Business School and FFBC: a Master of Management and a Master of International Financial Analysis. As founder and editor-in-chief of NewTrading.fr, he writes daily about financial trading.

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