Market orders are fine in 2024
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Many people fear using market orders to trade on the stock market. There is a belief that market orders are dangerous and we should only trade with limit orders.
Today, I want to delve into why market orders are fine. For my investing, I only use market orders. Of course, there are some differences. But if you are a long-term passive investor, chances are you would be fine with only market orders.
So, we will see why market orders are fine. More than that, market orders are the only order most people need.
Market Orders
First, what is a market order?
A market order is a stock market order to buy or sell at the market price. The market price is either the bid or offer price, depending on the direction of the operation.
Market orders are the simplest stock market order type. You do not have to configure anything else.
As they are the most basic stock market order type, market orders are available at each broker. Some brokers only offer market orders. And people are worried about using these brokers (like Neon or Yuh) because of that fact.
There are two main advantages to market orders:
- Market orders are simple.
- Market orders are extremely fast to execute.
There is also a current misconception that market orders are filling at the middle of the bid and ask price. However, this is not the role of market order; such an order is called a mid-price order.
Limit orders
The people against market orders recommend limit orders, the second most common stock market order type.
A limit order is also quite simple. Each order comes with a limit price as a maximum or a minimum. A buy order will not be executed higher than the limit price, and a sell order will not be executed lower than the limit price.
The advantage of a limit order is that you get a guarantee on price. But the disadvantage is that you do not know when your order will be executed.
The perceived issues of market orders
Many investors are worried about market orders.
They are mainly worried because they think these orders can be executed at any price. But this is not the case. Market orders are executed at the best price possible. So, if somebody creates limit orders well below the bid price, your marker orders will not match these orders (unless they are the only orders available).
Another reason people are worried is because they think brokers are using market orders to sell or buy stocks for them at better prices. But no reputable broker will do that. If you use a broker that does that, you have much bigger problems than choosing the best stock market order type.
As you can see, these issues generally do not apply to most situations.
Market orders are fine
The risks are limited if you are a long-term passive investor.
Indeed, if you have a simple portfolio of Exchange Traded Funds (ETFs), you will likely deal with shares of highly traded ETFs. If a stock or ETF is highly traded, a market order will be very efficient.
Indeed, there will always be orders to execute against your market orders. And since your market orders will first get the best price, you will not risk having a bad price.
On top of that, a highly traded stock or ETF will have a low spread. The spread is the difference between the ask price and the bid price. So, with a low spread, you will get a good price with market orders.
And with a good broker, you will not get any bad execution because of the broker’s debatable (or even illegal) practices.
The danger of limit orders
Since we are discussing the risks of market orders, we should also discuss the dangers of limit orders. And that risk is not obvious.
The problem with limit orders is that people are often too greedy. Many people will try to buy cheaper than the market. They will try to get a premium price. For instance, if the current price is 100 USD, some people will try to buy the stock or ETF for 99.50 USD.
On paper, this does not sound bad. However, what if the price is not met and the current price increases to 101 USD? In this case, the limit order will never be executed.
At this point, the investor will be met with a choice. Either he makes another limit order with a higher price or waits. In the first case, the investor lost 1 USD per share. In the second case, he may either lose more by waiting more or possibly be lucky and get back to 99.50 USD.
But this strategy depends entirely on luck. Using a limit order to try to save money is market timing. And most of the time, market timing does not end well.
Of course, some people are simply using limit orders to ensure the price on the current market price. And that is generally perfectly fine. But this can still be an issue if you do not have real-time data, like many people unwilling to pay for real-time data (no need for it). The limit you put, based on a 15-minute delay, may well be well off, and you again enter the realm of luck.
Therefore, I would advise caution with limit orders. Using them is no direct problem, but be careful not to optimize too much. If you are a long-term investor, either do not use them or use them as a guarantee with a price above the asking price or below the bid price.
Conclusion
If you have a long-term investing strategy, you only need market orders to invest in the stock market. I have not used anything besides market orders in over a year.
Unless you are trading some niche stocks, there will be enough volume on the exchange so that you will not have to worry about poor execution of your orders. The spread on a highly traded ETF will be minimal, and you will get excellent prices for your orders.
Therefore, I do not think people should avoid services without support for limit orders. As long as you are investing for the long term in well-traded positions, you will be fine with market orders.
What about you? What do you think about market orders? Which order do you use the most?
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Hi Baptiste,
I mostly use limit orders and even IB warns you that “it can be dangerous to use market orders” if you try to use them.
Guess I also like the little gambling effect of trying to have an order executed at a certain price ;-)
Perhaps one situation where limit orders make more sense over market orders is if using AON (All Or Nothing) orders because you don’t your order to be split in little chunks (I had the case with Saxo Bank where they were charging fees multiple times because they were in different days through splitting :-(
Hi Pedro
On IB, I sometimes had my market orders being split indeed, but it was always over the course of a few seconds, never more. It’s weird that you woul dge ta market order being split with a good enough volume.
Limit orders are fine as long as they are used properly. When I started investing, they reassured me, but now I feel fine with any market order.
Good point about AON. But again, do you really need it? If you want to buy 100 shares, do you really care whether they are split over multiple orders?
Well sometimes when buying or selling I find AON useful because I either get what I want completely or not… not, for example, keeping a trailer stock I wanted to get rid off and still having to fill several lines in VaudTax (they’re less efficient than FriTax who combined R-US164 and DA-1 on a single entry)…
Thanks for sharing! This is definitely an interesting use case :)
Hi Baptiste,
I really like your articles, but I’m not sure what you’re getting at with this one. Most established brokers offer both market and limit orders. Personally, I always use limit offers to avoid overpaying in times of poor liquidity. Also, many UCITS funds are not liquid enough for market orders. I think Neon and Yuh should offer limit offers asap.
Hi Ricardo
I thought the conclusion of the article was quite clear :)
For me, in the immense majority of cases, market orders are enough. The point on which you seem to disagree, which is fine. For me, the lack of limit orders should not be a barrier for adoption of Neon or Yuh.
As stated in the article, if you trade niche products or want to be an active trader, limit orders are better. But in this case, you need more than Yuh or Neon to be an active trader.