When you want your order filled right here, right now
While Questrade offers a pretty good order type help page, it doesn’t exactly give a clear idea of when to use the various order types available to you. We will start with the most basic order, the market order. Order types aren’t magic and aren’t going to guarantee you become any better of a trader or investor, but not understanding the basics could cost you money. As always, our standard disclaimer applies – check Questrade’s (or your preferred broker’s) own guide or talk to their support team if you don’t understand what you’re doing. .
The market order is the most basic of all order types. It tells your broker to buy or sell at the prevailing price, without regard for what that price is. You don’t get to enter any information except the quantity of the security you want to buy or sell, and the duration (which we’ve covered in other articles).
The market order makes sense when you want to get “filled” as quickly as possible – you want in or out, and you don’t care how much it costs you. For a highly liquid security, like $VT (Vanguard’s Total World Stock ETF), this won’t matter too much. But when the spread on a security is higher than a penny, it does matter. Let’s start by revisiting the concept of spread. The spread is the difference between the bid price (the highest price someone out there is currently willing to pay for the security) and the ask price (the lowest price someone out there is currently willing to sell the security for). In the case of $VT above, the spread is only a penny. But for many stocks, that spread is much wider. The “price” of a security that is generally used is the last price where the bid and ask matched up and a trade was made – the price where a buyer and seller agreed to transact. But that may not be the same as the current bid and ask. So if you think the price of a stock is $10, because that was the price of the last trade, but the ask price is currently $10.10, and you enter a market order, you may end up paying $10.10. Not a huge issue necessarily, but sometimes, this can have a significant impact. Without getting into the nitty gritty (we’ve done this in other articles, so check those out), you may be overpaying the fundamental value of the stock. And why do we say “may end up paying” more than you expected? Because there’s also the possibility that between the time you see the stock quote on your screen, with bid and ask prices, and the time you hit “execute,” and then even the time between that and the actual execution (which on a market order should still take fractions of a second), the bid-ask can still change. You might find you get filled at $10.12!
Market orders can further compound this problem of the buyer not knowing for certain the price at which they’ll get filled when you introduce the problem of the size of the bid and ask. In the above example, the bid and ask are both 8 shares. But our order is for 20 shares. So what happens if we place a market order? Assuming the market order flow doesn’t change between the time we got our quote and the time we get filled, we get 8 shares at the market ask price of $56.02. But what about our remaining 12 shares? We’re going to get filled at the next best ask price, which we can’t see here (you can see the entire order book if you subscribe to level 2 quotes – more about that in other articles). And that ask price could be $52.03, or it could be $52.50. Very quickly, your average cost per share can jump.
All these same issues also apply to sell orders. So, in short, market orders get you filled quickly, but it’s hard to know exactly what price you’ll get.