Every order that you place to buy or sell stock always goes into a processing system. That system places some orders before others.
With the stock market that has become entirely automated, the system works only based on the rules for the process it has set for. Therefore, if you want your order to get processed as fast as possible, you have to enter your buy or sell transaction as a market order.
However, with a market order, you have to take whatever price the market gives you. To better understand how to market order works in stock trading, we discuss it bellow.
Defining market order
With a market order to buy or sell, then, your order goes to the top of all pending orders in stock trading. In other words, your order will get executed immediately, regardless of the price.
During the trading day, pending orders for stock get arranged by price. That means the best ask price, which is the highest price, will place on top. On the other hand, the lowest bid price will place on the bottom.
As orders come in, they are filled at these best prices. But, if there is an order with a better bid price comes, it replaces the previous order to be on the top of the list.
Contrarily, if you submit a market sell order, you receive the lowest price on the market. Mostly, you should avoid using market orders. Using market order will make you pay top dollar or sell for the bottom price.
Also read: Stock Trading 101: Why are Market Makers Essential?
Besides, you will also pay for a little mischief known as slippage. Slippage occurs when a market maker changes the spread to his advantage in market orders.
Many still debate about this, but you still have to be careful that you may pay a small premium. That premium is the market maker’s extra profit.
