March 28: Market Orders in Stock Trading

by David Jenyns on March 28, 2007

A market order is simply instruction given to you from your broker as to whether you should buy or sell a certain stock at that very moment for the best price possible. Because a market order guarantees execution, either buying or selling stock, it offers brokers low commissions because of the minimal work that is involved. You have to be careful with market orders on stocks that have a low daily volume, meaning that a certain stock does not increase very much daily, therefore, when you sell it, the profit that you gain, if any, would not match that of what you, in fact, bought each stock for. Therefore, you should feel more secure using a market order on stocks such as Microsoft that steadily increase on a daily basis.

As with all orders, there are advantages and disadvantages to the market order. Focusing on one specific advantage, you are virtually guaranteed that your order will be executed, pending that there are willing buyers and sellers available who are interested in your particular stock. For example, you own 100 shares of stock from Borden, a dairy product provider, from which you have received a steady increase in profits. You broker, however, informs you that it would be a wise decision to sell those 100 stocks in Borden in order to purchase stocks from Wal-Mart because those stocks are producing 47% higher profits than the stocks from Borden.

Your broker also informs you that there are several people available who would like to buy your stocks in Borden, so you must make the decision immediately as to whether you would like to sell your stocks. You agree due to the higher percentage in profit that Wal-Mart stocks provide, and immediately your stocks are sold due to the fact that people are waiting to purchase them.

A main disadvantage with a market order is that the price you pay when the actual purchase transaction takes place may not be the initial quote that was given to you by your broker. For example, your broker contacts you and says that Microsoft Corporation is offering a tremendous deal on their stocks in which you are able to purchase one share of stock for $25.00. You quickly agree to purchase 100 shares of stock and before the broker has time to put the order into the computer, the price of the Microsoft stock has increased to $50.00 per share. Rather than contacting you about the cheap price of Microsoft stocks, your trusted broker should have simply purchased the stock at the moment to ensure that you would receive the lower purchasing price. So, it is typically better, when you invest in larger corporations to have your broker instantaneously make decisions that will gain profit for you in the long-run.

That being said, the absolute best time to execute a market order is when low volumes of shares from a particular company are not gaining any profit, pending that people are waiting to buy that particular company’s shares of stock. For instance, you own 10 shares of stock in Best Buy, an electronics company, but you don’t feel that you are gaining enough profit from it. So, you contact your broker for a consultation.

After the consultation, you realize that if you sold your 10 shares of stock from Best Buy and bought just 5 shares of stock in J.C. Penny, a department store, your profits would increase by 39%. Plus, there are eager buyers available to purchase your Best Buy stocks for 25% more than you paid for them. (If you paid $1500 per Best Buy share, people are currently waiting to buy them for $1875. That’s an $1875 profit that you could use to purchase even more stock in J.C. Penny in order to increase you earnings!) Just remember as with any stock market transaction, there is a certain amount of risk involved.

Becoming more educated about exactly how the stock market functions will help to reduce the amount of risk you take with you stocks if you are the type of person who is not a risk taker.

Market orders have great potential to work totally at your advantage if you have a trust-worthy broker in which you secure all your money transactions. As with any stock market transaction, it takes a genuine relationship with your stockbroker to ensure gains in profit as well as reduced stress about investing your money into such a fluctuating financial market.

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