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Despite market volatility and downturn over the last few months, stock investing continues to be increasingly popular due to the ease of DIY investing through online platforms and mobile apps. This also means many novice investors are placing buy and sell orders for stocks. If you’re new to DIY stock investing make sure you know the difference between types of orders. To help we’ll be going over three specific types of orders in our blog over the next three weeks. Today we’ll start with market orders.
A market order is the most basic type of order you can use when purchasing or selling stocks. When purchasing stocks using a market order you are willing to pay whatever the current price of the stock is at the time of your order execution. It is the same when you are selling using a market order. Whatever price the stock is at the time of the order execution is what you will receive for your sale.
When using a market order to buy or sell you are almost guaranteed that your order will go through, but there is no guarantee on the price.
Let’s look at a few examples to see how a market order can work. We’ll start with a purchase. Let’s say you want to purchase 100 shares in a company. When you research the company you find they are trading at $5.05 per share. You input a market order to purchase 100 shares and your order is received. When the order is executed the price has risen to $5.09 per share, which is also the current ask price for those selling the shares. Your market order executes at $5.09 per share which means you have paid $509 for those 100 shares, not including any fees or commissions that may be charged.
Now let’s look at a sale using those same 100 shares you just purchased. You have held onto your shares for a few years but suddenly need some extra cash and decide to sell. When you research your shares they are currently priced at $5.45 per share. Under that price your shares are valued at $545. You input a market order to sell your 100 shares and your order is received. When the order is executed the share price has dropped to $5.42, and your 100 shares are sold for $542, not including any fees or commissions on the transaction.
This is the risk associated with a market order. You can be all but assured that your order will be executed but you do not know if the order will execute at the price you may be seeing on the screen or stock ticker. Because of this investor should always review their order confirmations and transaction record so they know the exact execution price when a trade is made.
Next week we’ll continue our look at orders with Limit Orders.