When I buy/sell stocks, there is always an option called 'market price'. How is the market price defined?
Is there any detailed explanation?
Thanks,
asked Sep 16, 2014 at 8:12
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2 Answers
If you select Market Price instead of Limit Order, you will be executed straight away at the current Market Price.
For example, if the current highest bid is 1000 shares at $9.98 and the lowest ask is 1000 shares at $10.00 and you place a Market Order for 1000 shares, you will get executed at $10.00.
Another example, say the current highest bid is 1000 shares at $9.95 and the lowest ask is 1000 shares at $10.00 followed by 1000 shares at $10.05 as the next ask in the list, and you put a Market Order to buy 2000 shares, then you will still be executed straight away, however, you would have bought 1000 shares at $10.00 and the second 1000 shares at $10.05.
Market Orders should be used when you want to make sure that your order gets executed and are not too concerned if it gets executed at a slightly higher price than the last traded price. Market Orders are often used in combination with Stop Buy and Stop Sell orders.
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A Stop Buy is when say the current price is $10.00 and you want to buy only if the price breaks above current resistance at $10.20, so you put a Stop Buy order at say $10.21. If the price does not reach $10.21 your order will no be executed. If it goes to $10.21 or higher your order will be executed. If you put a Limit Stop Buy at $10.21 and the price reaches $10.21 your order will be executed at any price of $10.21 or lower. If you place a Market Stop Buy order your order will be executed at any price $10.21 or higher.– VictorSep 17, 2014 at 11:05
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A Stop Sell is when say you bought a stock at $10.00 and want to limit your losses at say 10%, so you would place a Stop Loss order to sell your stocks at $9.00. If the price falls to $9.00 or below you will automatically sell your stocks.– VictorSep 17, 2014 at 11:12
Victor puts it right through out. Just to help you understand better, market prices are the one at which an order can be executed right away. There is a way it is defined. In case of ask order usually its the lowest bid price available and in case of bid order it is the highest ask price available. Now these "lowest bid price" and "highest ask price" changes with people's expectations of market trends based on information from various sources. So for example, in a bull run, you'll see highest ask price escalate quickly as new buyers want to join in with bullish expectations and the lowest bid price also rises with the expectations of sellers that there is a good demand of the security offered. Thus the market price rises. And similar is the case for falling market prices. This is my understanding of the system so far. Correct me if I am wrong.
