When you want to buy or sell a stock, your order goes into a processing system that puts some order before others. The stock markets are now almost completely run by computers that work off a set of rules for processing orders. If you want your order processed as quickly as possible and will take whatever price the market gives you, then you will want to enter a market order.
A market order to buy or sell goes to the top of all pending orders and is executed immediately, regardless of price. Pending orders for a stock during the trading day are arranged by price. The best ask price, which would be the highest price, is on the top of that column, while the lowest price, the bid price, is on top of that column. As orders come in, they are filled off these best prices. If an order with a better bid price comes in, it goes to the top of the list.
When a market order is received, it gets the highest or lowest price available. In other words, when you submit a market order to buy a stock, you pay the highest price on the market. If you submit a market sell order, you receive the lowest price on the market.
In most cases, you should avoid using market orders. Not only will you pay top dollar or get bottom price, but you will pay for a little mischief known as slippage. Slippage occurs when a market maker changes the spread to his advantage on market orders. This is a questionable practice, but beware that you may pay a small premium, which is the market maker's extra profit, if you use market orders to buy and sell securities.
Slippage is the difference in the bid-ask spread from the time you enter an order to the time it is filled. Another form of slippage involves the market maker upsetting the applecart with a change in price to take advantage of an upcoming market order.
When to Use Market Orders
Is there ever a time when a market buy or sell order is okay? Absolutely. If you are caught in a bad position and the market is moving against you, it's time to bail out in a hurry and not worry about slippage.
Most investors are very concerned with controlling entry and exit prices; however, as noted above, there will be times when buying or selling the stock is more important than price. The danger is convincing yourself that you have to own a "hot" stock at any cost and using market orders to grab shares.
Thanks to high-speed innovations, small market orders can zip into the market without much warning and be filled. Most investors will not be concerned with a few cents loss to slippage, but if you are not careful it can be much worse than pocket change.
Placing a Market Order
Placing a market order is saying you want to buy the stock regardless of price. If you were giving a verbal order to your stockbroker, it might go like this:
Buy 200 shares of IBM at market.
You use the same process to sell a stock at market: Sell 200 shares of IBM at market.
Assuming you are using an online broker, the order is entered on the order screen. If the stock is actively traded, a market order will be filled almost instantly unless there is an unusually high volume in this particular stock. However, in a fast-moving market even almost instantly isn't fast enough to ensure the price you saw when you placed your order is the exact price you receive.
In most cases, you will get close to the buy or sell price you saw when you entered the market order. However, if there is high activity in that particular stock you may get much less or pay much more.
If there are other market orders in front of yours (entered before yours), the stock's price may change dramatically.
Even in normal market conditions, when you enter a market order to buy you will pay the highest price (from existing sell orders) and a market order to sell means you will receive the lowest price (from existing buy orders).
For a stock trading in a narrow range, a market order may not penalize you much. However, when the stock is drawing a lot of activity, you may find a market order is the "buy high, sell low" solution. If you can live with that, go for it.