Analogy: "Assume your partner says the following: “Go buy some orange juice because we’re out!” Your partner just gave you a buy market order for orange juice. They want orange juice and didn’t mention anything about price. You’ll bring home orange juice, but it’s possible you paid a high price." ~Achievable
A market order enables users to sell and buy financial assets immediately at the best fee available currently. Market orders get costs from limit orders on the order book, meaning one cannot be entirely sure of the fee they will get. This causes a slippage, which happens when a user gets a fee that is different from what they expected.
The major difference between limit orders and market orders is that you can place the latter in advance with a specific fee. The exchange will fill your order at the specific cost or better.
Market orders are liked by crypto users because of their simplicity, efficiency, and the ability to completely fill in most cases. Nonetheless, one needs to be present to execute the order and market orders have a high risk of slippage.
How Do Market Orders Work?
Market orders are instantly executed in the market unlike limit orders that are put in order books. A trade usually has two sides: the maker side and the trader side.
When you place a market order, you are taking the fee decided by someone else. For instance, a trade will go hand in hand with a purchase market order to the least ask cost on the order book. Contrastingly, a sell market order will match the top most bid cost on the order book.
Market Order vs Limit Order
Limit orders are "orders to buy or sell a quantity of a financial asset at a set price or better." Users can decide if the exchange will fill their limit order partially or fully. Note that if you want it to be filled totally and the exchange cannot do that, the order will not be executed at all.
Existing limit orders are the only ones that can fill market orders. A limit order is good alternative because not everybody wants to use the available price in the market while investing or trading.
Additionally, traders can use limit orders to plan earlier for their trades without having to be present at their desks trading.
Market orders and limit orders are used for different goals and activities. Limit orders are usually used for:
When the the cost of an asset has high volatility
When an assets has low liquidity
If the trader already has a plan .
On the other hand, market orders are used for:
When traders are getting their orders filled, which is more crucial than getting a specific cost.
Traders need to only use market price if they are willing to pay a higher cost brought about by slippage.
At times, one can find themselves in a situation where a " stop-over limit order was passed over" and you are required to sell and buy sooner than expected. This is where market order comes in to get you out of the trouble.
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