In this video we're going to break down market orders in more detail,
we'll look at how to actually place a market order, and we will talk about some of the
pros and cons of using this order type. So what is a market order? Placing a market
order means that you are willing to buy or sell a stock at whatever the current market
price is - in other words, whatever price the stock is currently trading at. The market price
of a stock is constantly changing depending on the supply and demand for that particular stock
that you're looking at. When you place a market order, you cannot specify the price of your trade.
Let's see how this actually works and where a market order can go wrong. When you place a
market order it is going to buy or sell the stock at whatever the current price is between when you
press the buy button and when the trade executes. Usually that time is just a few milliseconds. Not
every brokerages allows you to see real time quotes, or in other words, the live prices of
stocks. Many brokerages have a 20 minute delay on their market data. If you place a market order,
and you're looking at a chart that has that 20 minute delay on its data, that means that the
price of the stock had 20 minutes to change, and that stock potentially had 20 minutes to change
direction. For longer term investors, this may not have as much of an impact as it would on say,
day traders, but it is still important that you actually check with the brokerage you are using
and see if they are giving you real time quotes or that live market data. Even with those real time
quotes, it is still possible that the price can change in those few milliseconds. With extremely
volatile stocks, or stocks that move very quickly, what can happen is that you can press
buy when the stock is here, but in that those small milliseconds where your trade is executing,
the stock can potentially skyrocket or take a steep dive, and your trade can actually goes
through at a much different price than you intended. This goes for buying or selling.
You can press sell here, but if the price plummets you may actually sell here at a much worse price.
If we want a little bit deeper understanding of a market order, it's important that we understand
how the bid-ask spread works. The bid is the price that a buyer is willing to pay for a stock. And
the ask is the price that sellers are willing to sell that stock for. You can think about it the
same way that an auction works. The people who are buying are the bidders, and the people who
are selling are asking for a particular price. So the difference between the highest bid price and
the lowest ask price is called the spread. The bid-ask spread is very dependent on liquidity,
or the volume or how much that stock is actually being traded. For a stock that's
very highly traded, that spread is likely going to be smaller because it's a little more competitive,
but for a stock that isn't traded very much or that has very low volume, that spread is likely
going to be bigger. And we'll see how this affects your buying or selling in just a minute. With a
market order you are immediately agreeing to buy at the current ask price or to sell at the current
bid price. If you're using a trading platform like ThinkorSwim you can see those bid and ask prices
in the level 2 panel. So how does this affect your trading? Let's say that the current ask price of a
stock is at $10 with 100 shares available. If you were to place a market order to buy 300 shares,
the first 100 will execute at that $10. But the next 200 shares will fill at the next best asking
price. If the stock is traded at a high volume, it's more likely that someone else will be trying
to sell the stock somewhere around $10 as well. However if the stock has very low volume, the next
best asking price may be much higher than you anticipated. So it's possible that the remaining
200 shares of your order could be filled at a much worse price. This is one of the many reasons why
many people prefer using limit orders over market orders. Now let's look at how you actually place a
market order. So I'm going to go ahead and open up Robinhood to show you how to actually place
an order when you are buying a stock and when you are selling a stock. So first we need to actually
find a stock to purchase. I'm going to go ahead and click on that magnifying glass in the bottom
middle of the screen. And I'm going to search for Pinterest and this is the stock that we will use
for this example. So we will click on that trade button, but see how the price is changing at
the top? When you place a market order, you are agreeing to buy the stock regardless of what that
price changes to when your order actually goes through. So we're going to go ahead
and select "trade". We will select "buy" for this example. And from here you can enter the number of
shares that you want to purchase. You can see that it shows you that market price - you can
see it just changed. And if you actually click on "market price" it will bring up the bid-ask
spread for you, it'll show you the last sale, and if you need any more information on that,
Robinhood has other pages on how they handle those things. So I'm going to go back, click dismiss,
and we'll go ahead and enter a share. W'ere just going to put in 1, and you'll see that it updates
that estimated cost for us. If we change the number of shares to 2, that price is going to
update, and again you can see that that price is actually changing, and when we do put in 2 shares,
it's also going to change for that as well and update that price for us accordingly. If you want
to change the order type and you don't want to use a market order, you would click on that button
in the top right corner, and from there you can select any of your different order types,
or you can select to buy in fractional shares which we will go over later in the video. I'm not
actually going to go all the way through with this order, but if you did actually want to purchase
this stock you would go ahead and enter that number of shares that you want, you would click on
that review button, Robinhood is going to give you that popup at the bottom with more information.
If you are good with that market price, you would swipe up, and that is how you would place a market
order. Let's go back to the main screen and I'll walk through how market orders work with selling.
So I'm going to sell off one of these random free stocks that Robinhood gave me. If you want a free
stock, link in the description, when you sign up you do get a free stock with Robinhood. Right now
they're running a promotion for 3 free stocks - not sure how long that lasts. But what I'm going
to do is select one of these stocks that I don't mind selling. And from here we are going to click
on that "trade" button again. This time "sell". And it's going to bring us back to that exact
same page. This is going to work exactly the same way as placing the buy order, but this time that
market price means that we are okay with selling at whatever the current price is. So of course
you can still click on that question mark next to the market price. It's going to bring up that same
bid- as spread screen. I'm just going to sell 1 share of this. But again if you do want to change
that number of shares, I have 5 shares available, so if I sold all of them, that price would update
under that estimated credit. So this time we are going to click "review" and I will swipe up to
submit. And there we go, order received. Then you'll get this screen that tells you what your
trade actually went through at. And you'll get this for buying as well, but since I didn't go
all the way through with that order, we didn't see this screen last time. But this is the same screen
that you will see whether you are buying or you are selling. You will get to see what price your
trade actually went through for. I also wanted to mention that some trading applications like
ThinkorSwim will have simple "Buy" and "Sell" buttons, and unless you change your settings,
those buy and sell buttons are going to execute a market order. But of course, always check that
for the particular brokerage or trading platform that you are using. So how do market orders work
with fractional shares? If they even offer it, different brokerages handle fractional shares in
different ways. There are some brokerages that only allow you to do market orders when you are
placing an order for a fractional share. Let's go ahead and open Robinhood back up. Fractional
shares work pretty much the same way. We're going to use the same 2 stocks as examples, so let's
start again with buying Pinterest. So once we are at that screen, we are going to press that "Trade"
button again. We're going to press "Buy". And this time we can actually enter a fractional share. Now
we could have done that before, but I wanted to separate these two for the sake of explaining.
So we can enter .5 if we want. If we wanted to enter a smaller amount we could. So we could
make that .01 and that estimated cost is going to update even if you enter a fractional share.
It's going to show you what that estimated cost is actually going to be based on that current market
price that you are agreeing to pay. If you don't want to guess on a weird decimal to try to match
the amount of money that you are trying to put in, with fractional shares you can actually just
enter a dollar amount. So we are going to click on that "Shares" button in the top right again,
and the option that we're going to change it to is this first option that's "Buy in Dollars".
And when we select that it's going to take us to a screen that just prompts us for a dollar amount.
They have those quick $1, $10, and $100 buttons that you can select or you can just enter your
own amount. You can enter any amount - you can enter $1 and once we hit that review button,
it's going to show us how many shares that dollar amount would actually buy. Again with a market
order that is going to be changing constantly, but you do have that order summary at the bottom that
gives you an idea of what you can expect. So if you wanted to place that order, you would swipe up
to submit, and again you would get a confirmation screen after your order actually goes through.
But I am just going to go back to the main screen and I will go all the way through
with a sell order. So I'm going to sell some more of one of those random free stocks I have. Again,
we're going to go back to that screen, if you want to change it back to shares from dollars, again
you click that button in the top right corner, and that is going to bring up all of your buying or
selling options. So again you can enter a decimal, or we can change it back to that dollar amount and
just enter a dollar amount. So for this I am just going to leave it at $10, and we'll click
"Review". Again, it updates the shares, you can see your order summary, and once we're ready to
place that sell market order, we are going to swipe up to submit, and we will get that
confirmation screen that tells us again how many shares were actually sold. And in the description
I'll also link an SEC article about stock slices and fractional investing if you are a little bit
confused about that. So there are definitely both pros and cons to using market orders.
Some of the pros are that it's fast and depending on the situation, there's potentially a higher
chance of that order actually going through. And the cons are that you can't specify the price that
you want, and if that stock moves too quickly, you may actually end up buying or selling at a much
different price than you intended. Those are the basics of the market order but there are 3 other
order types that you should also know when you're investing. If you want to learn more about those,
click on this video right here, and I will see you guys over there in that video.