TL;DR
Market orders allow you to buy or sell financial assets instantly at the best price currently available. Market orders take the price of the limit order in the order book. This means that you cannot be 100% sure of the price you will get. Slippage can occur when you get a different price than expected.
The difference between a limit order and a market order is that you can place it earlier at a specified price. The exchange will only fill your order at the specified price or better. You can place market orders easily on the Exchange in the exchange view. You can find it by clicking [Market] under the [Spot] tab.
The main advantages of market orders are their simplicity, immediacy, efficiency, and ability to be completely filled in the majority of cases. However, market orders will be in a weak position due to the risk of slippage and the fact that you must be present when executing the order.
Introduction
There is more complexity to trading than simply deciding to buy or sell. When buying or selling any financial asset, such as cryptocurrency, stocks, or forex, you will encounter a variety of order types. Starting from Fill or Kill to stop-limit orders, market orders are one of the simplest orders and are often used by beginners. Let's look at an explanation of market orders and how they work.
Definition of market order
A market order is an order to immediately buy or sell at the best price available. These orders require liquidity to be filled. This means that this order is executed based on the limit order that has been placed in the order book. If you want to buy or sell instantly at the current market price, setting a market order is the best choice. For example, the price of BNB may rise rapidly and you may want to buy it immediately. You are willing to take the market price as long as you can buy BNB instantly. In this case, you should place a market order on the exchange of your choice.
How market orders work
Unlike limit orders placed in the order book, market orders are executed instantly at the current market price. There are always two sides to a trade, namely the maker and the taker. When placing a market order, you take a price determined by someone else. For example, an exchange will match a buy market order with the lowest ask price in the order book. Conversely, sell market orders will be matched to the highest bid price in the order book.
As mentioned, market orders require an exchange to have liquidity in the order book to fulfill instant demand. When market orders take away liquidity from the exchange, you will pay higher fees as a market taker when placing those orders. Binance's fee list shows the difference between maker and taker fees clearly.
Example of a market order
It would be much simpler to see the relationship between market makers and takers with numbers. So, let's look at an example. Imagine you want to buy 1 BNB and the current market price is around $370 (US dollars). You visit Binance, then open the BNB/BUSD pair. To create a buy market order, you enter 1 in the amount field and then click [Buy BNB].
After placing an order, the exchange will look at the order book. This ledger contains limit orders with a certain amount and a specified price to buy or sell an asset. In this case, your market order to buy 1 BNB at the market price (also known as the spot price) will be matched against the lowest sell limit order in the order book.
As can be seen, the lowest sell limit order on the books is for 1,286 BNB at $371.40 (BUSD). Your buy market order would purchase 1 BNB of the 1,286 BNB on offer, giving you a spot price of $371.40.
However, let's say you want to buy 500 BNB at the current market price. The cheapest sell limit order available does not have enough volume to fill your entire buy market order. Your remaining market order volume will be automatically matched to the next best sell limit order and climb the order book until it is completely filled. This process is called slippage and it is the reason you pay higher prices and fees (or accept lower prices) as a market taker.
Market order vs. limit order
In short, a limit order is an order to buy or sell a certain amount of a financial asset at a specified price or better. You can also choose whether the exchange can partially fill your limit order or whether it must be filled completely. In the second case, if the exchange cannot fulfill your order in full, it will not be executed at all.
Market orders can only be filled with existing limit orders. Not everyone wants to take the price available on the market when trading or investing, so limit orders are a good alternative. You can use limit orders to plan trades in advance without having to be at the desk and trade in person.
Aside from these basic differences, market orders and limit orders are suitable for a variety of trading activities and purposes. Limit orders are usually better to use:
1. When asset prices have high volatility. Placing a market order in a market with high volatility can produce unexpected results. The price may change between when you place your order and when the order is executed. This small difference can determine profits and losses for the arbitrageur. Limit orders will ensure that you get the price you want or better.
2. When the asset has low liquidity. In this case, using market orders can cause slippage. This occurs when there is low volume for market makers on the order book and your order cannot be filled easily around the current market price. Then, you will have a lower average selling price or a higher average buying price than you imagined. On the other hand, a limit order will not be filled completely if slippage takes the price beyond your limit.
3. If you already have a strategy. Limit orders do not require any interaction from you to start filling and can be placed early. This means that your strategy can still be executed even when you are not actively trading. You can't do the same with market orders.
When to use market orders?
As we can see, market order is useful when filling your order is more important than getting a certain price. That is, you can only use market orders if you are willing to pay a higher price caused by slippage. In other words, market order is useful if you are in a hurry.
Sometimes, you may be in a situation of having a stop-limit order missed and need to buy/sell as soon as possible. So, if you have to trade urgently or need to get out of an unwanted situation, market orders will be a useful option.
However, if you are not new to crypto and want to buy some altcoins with Bitcoin, do not use market orders as you may end up paying more than necessary. In this case, a limit order may be better.
When trading highly liquid assets with a narrow bid-ask spread, a market order will provide a price that is close to or at the expected spot price. Assets with larger spreads have a greater chance of causing slippage.
How to place a market order on Binance
For example, you want to create a market order to buy 2 BNB. After logging into your Binance account, open the exchange view. Select the desired BNB market (for example, BNB/BUSD), find the [Spot] tab, then select [Market]. Then, set the purchase amount to 2 BNB then click the [Buy BNB] button.
After that, you will see a confirmation message on the screen, and your market order will be executed.
Advantages of using market orders
Depending on the situation, there are three main advantages to using market orders:
1. Market orders are easy to use. If you want to trade highly liquid coins like Bitcoin or ETH with a large market cap, market orders are a pretty safe option to use.
2. You can buy or sell the full desired amount of an asset. If you need to close all positions or open them as soon as possible, a market order can almost always guarantee that you will be able to do so.
3. You can trade immediately. You may have limited time to execute a trade, such as just before closing time. You can rest assured that a market order will almost always be the quickest way to do this.
Disadvantages of using market orders
Although its main strength is its speed, market orders are very weak in the control you have. The main drawbacks are as follows:
1. You can experience high slippage with low volume assets. You may have to pay more than planned or receive much less. Without sufficient volume in the order book, you will either move up or down the orders placed.
2. You cannot plan trades in advance. You can't always be in front of the screen and ready to trade. If the market moves against your trading strategy while you are sleeping or unavailable, you will not be able to place a market order. Instead, you can use limit orders or stop-limit orders to plan ahead.
For more information about limit orders, please read: What is a Limit Order?
For more information about stop-limit orders, read: What is a Stop-Limit Order?
Closing
Market orders provide the most basic method for buying and selling financial assets. This is the best option to enter or exit the market immediately. However, the downside is that there is no level of control that you would get from other order types. The best alternative is to consider the specific situation you are experiencing and understand when it is best to use market orders or other orders.
