How to Use Market Orders

One of the first things I was “taught” when I started trading was “never enter a trade with a market order, since you’ll lose the “spread” between bid and ask. At that time, shares were traded in fractions. You know, 14-1/2 or 76-1/18. So maybe the rule made more sense back in the halcyon dot-com days. Still, I've heard guys like stock market guru Jim Cramer espousing the same, tired "one-size-fits-all-stocks" strategy.

A market order is, of course, the simplest and most common type of stock trading order. A market order tells your broker to buy or sell a stock for you immediately at the “best price” they can get. Since you do not specify a price, this type of order will almost always be filled, but it may not necessarily correspond to the current market price because the price may have moved by the time the broker executes the trade.

Moreover, many traders I know accuse the market makers of actually delaying execution of market orders to generate higher (or lower) prices for your shares. I happen to believe that it's probably true.

While the rules seem to make sense, it often falters in the true light of the trading day. Why? Because different stocks being bought and sold (some would say “manipulated”) by experienced market makers, behave in different ways.

I know one stock in particular where the market marker uses your trading offer as just another excuse to bump up the price another notch. And while I’m jacking around trying to outguess which way the stock is going to move, the stock will just as often keep moving away from me and I’ve got to chase the price upward and I simply hate doing that. I always wind up paying a higher price for the stock when I could have simply placed a market order at the going price and bought the stock, put my order in on the "ask" and be done with it.

With stocks that behave like this, and there are many of them, I don’t play games. I’ll either try to buy it by placing a limit order between the bid and the ask, or simply place an order on the ask if the spread is fairly narrow (a couple of cents or less). If I’m lucky and it drops a few cents, my limit order will reflect that drop and save me a few bucks.

Not so with other stocks I follow. Limit trades for GOOG, for example, seem to be executed if you’re anywhere near the going price because it jumps around 10-, 20-, even 30-cents in a single second or two. But like I said, all stocks behave differently.

My best advice is this:  know your stocks and how they behave. Bid according to your research. Play each stock as its idiosyncrasies dictate. That’s why we have limit, market and stop orders.