Friday, January 21, 2011

Buying or Selling Stock: Another Downside of Market Order

When you buy or sell stock online, you can do this as a market order or as a limit order. (Yes, there are even more sophisticated ways, but for now this will do.)

Market Order: Buy or Sell at the price that the market allows at that moment the order is placed.

Limit Order: Do not buy or sell UNLESS the stock reaches this limit price. Do not pay more or sell for less than this limit.

Honestly, I've bought and sold both ways.

A limit order is supposed to be less stressful. It allows you to control when you buy or sell something. It allows you to place an order and walk from your computer, and things can happen without you having to monitor it.

A market order makes sense (to me) when you know that the price is SO good, that you do not want to run the risk of failing to execute over a few pennies. You recognize that you already have something good, and by placing a market (immediate) order, you know that you already have an acceptable profit in hand. You do not have to worry weather the market will move just a little bit more in the direction that you want for the buy or sell order to trigger.

However, there is another downside to placing a market order.

Actually, this downside is most noticeable if you place an order with a lot of shares.

I've noticed, for instance, if you place an order for 2,000 shares of something, the first 300 shares, or so, will be near the price that made you want to buy or sell. Then you see that you either bought or sold the remainder of your order at worse and worse prices.

Truthfully, I do not know whether this happens all of the time.

If it does, then I'm thinking that it could be a way for the brokerage to make a few extra bucks. It might also be that your buying or selling is momentarily driving the market in the wrong direction for you.

Maybe other people have different experiences with this, but I can only tell you mine.

Final Advice: If you have an order with a lot of shares, either
  • place a limit order for the entire lot, or
  • place individual smaller market orders.

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