TL;DR (SUMMARY)
A market order allows you to buy or sell a financial asset instantly at the best price currently available. Market orders take the price of limit orders from the order book. This means you can't be 100% sure of the price you'll get. Slippage can occur when you get a different price than expected.
Limit orders differ from market orders in the fact that you can generate them in advance with a certain price. The exchange will only fill your order at the specified price or better. You can easily generate market orders on Binance in the exchange view (TradingView). You must click on [Market] under the [Spot] tab.
The main advantages of market orders are their simplicity, immediacy, efficiency and the ability, in most cases, to be fully completed. However, market orders have disadvantages due to the risk of slippage and the fact that you must be present when executing them.
Introduction
Trading is more complex than simply deciding to buy or sell. When you buy or sell any financial asset, be it cryptocurrencies, stocks or forex, you come across different types of orders. From Fill or Kill orders to stop-limits, market orders are some of the simplest and are often used by beginners. Let's see then what market orders are and how they work.
Definition of a market order
A market order is an order to buy or sell immediately at the best available price. It needs liquidity to be filled, which means it is executed based on the limit orders already created in the order book. If you want to buy or sell instantly at the current market price, setting a market order is your best option. Let's say for example that the price of BNB is increasing rapidly, and you want to buy the coin as soon as possible. You are willing to accept the market price as long as you can purchase BNB immediately. In this case, you set a market order on the exchange of your choice.
How a market order works
Unlike limit orders that are generated in the order book, market orders are executed instantly at the current market price. Every trade always has two sides: that of the maker and that of the taker. When you create a market order, you are taking the price set by someone else. For example, an exchange matches a buy market order to the lowest ask price in the order book. In contrast, a sell market order will be matched with the highest bid price in the order book.
As we have mentioned, market orders require the exchange to have liquidity in the order book to meet instant demand. Since the market order withdraws liquidity from the exchange, you will have to pay higher commissions for being a market taker. The Binance commission scheme clearly shows the differences between the commissions of makers and takers.
Market order example
It's much easier to understand the relationship between a market maker and a market taker through numbers, so let's look at an example. Let's imagine you want to buy 1 BNB, and the current market price is around 370 US dollars (USD). You log into Binance and open the BNB/BUSD pair. To create your market purchase order, enter 1 in the quantity field and click [Buy BNB].
After creating your order, the exchange analyzes the order book. This ledger contains limit orders with a specific quantity and price for the purchase and sale of 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 in the order book with the lowest sell limit order.
As you can see, the lowest sell limit order listed in the book is 1.286 BNB at 371.40 BUSD. Your market purchase order will purchase 1 BNB of the 1,286 BNB offered, at a spot price of 371.40 BUSD.
But let's say you want to buy 500 BNB at the current market price. The cheapest sell limit order available does not have the necessary volume to fully fill your buy market order. The remaining volume of your market order will automatically be matched with the next best sell limit order, moving forward through the order book until your entire order is complete. This process is called slippage and is why you pay higher prices and commissions (or receive a lower price) as a market taker.
Market orders vs. Limit orders
Briefly recapping, limit orders are orders to buy or sell a certain amount of financial assets at a set price (or a better one). You can also choose if the exchange can partially fill the limit order or if it must fill it completely. In the latter case, if the exchange cannot fully fill your order, it will not even execute it.
Market orders can only be filled with existing limit orders. Not everyone wants to take the available price in the market when trading or investing, so a limit order is a good alternative. You can use limit orders to plan your trades in advance without needing to be present when the order is executed.
Aside from these basic differences, market orders and limit orders are appropriate for different trading activities and objectives. Limit orders are usually best used:
1. When the price of an asset is very volatile. Creating a market order in a very volatile market can generate unexpected results. The price may change between the time you create the order and the time it is executed. These small variations can be the difference between making a profit or a loss for arbitrageurs. A limit order guarantees that you will get the desired price or a better one.
2. When an asset has little liquidity. In this case, using a market order can cause slippage. This occurs when there is a low volume of market makers on the order book, and your order cannot be easily filled around the current market price. So you end up with a lower average selling price or higher average buying price than expected. A limit order, on the other hand, will not be fully filled if the slide takes the price outside your limit.
3. If you already have a strategy. Limit orders require no interaction on your part for them to begin filling, and you can create them in advance. This means that your strategies can be executed even if you are not actively trading. You can't do the same with market orders.
When to use a market order?
As we have seen, market orders are practical when completing the order is more important than obtaining a specific price. This means that you should only use market orders if you are willing to pay a higher cost as a result of slippage. In other words, market orders are useful if you are in a hurry.
It is possible that at some point you had a stop-limit order exceeded and needed to buy or sell as soon as possible. So if you have to make a trade immediately or escape from a problem, market orders are very practical.
Now, if you are new to cryptocurrencies and want to buy altcoins with your Bitcoin, avoid using market orders because you could end up paying more than necessary. In this case, a limit order is probably better.
When you trade very liquid assets and a tight bid/ask spread, a market order will give you a price close to the expected spot price. Assets with a higher spread are more likely to cause slippage.
How to create a market order on Binance
Let's say you want to create a market order to buy 2 BNB. After logging into your Binance account, go to the Exchange View (TradingView). Choose the BNB market you want (for example, BNB/BUSD), locate the [Spot] tab and select [Market]. Next, set 2 BNB as the amount you want to purchase, and then click the [Buy BNB] button.
You will now see a confirmation message on the screen, and your market order will be executed.
Advantages of using a market order
Depending on the situation, using a market order has three main advantages:
1. Market orders are easy to use. If you want to trade a very liquid currency with a large market capitalization, such as Bitcoin or ETH, a market order is a fairly safe option to take advantage of.
2. You can buy or sell as much of an asset as you want. If you need to close all your positions or open a new one as soon as possible, a market order almost always guarantees that you can do so.
3. You can trade immediately. You may have a limited time to execute a trade, such as just before closing hours. You can be sure that your market order will almost always be the fastest way to make your trades.
Disadvantages of using a market order
Although the strength of a market order lies mainly in its speed, it has shortcomings regarding the control it gives you. Its main disadvantages derive from the following facts:
1. You may experience high slippage with low volume assets. You could end up paying more than planned or receiving much less. Without enough volume in the order book, your order will escalate or descend through the orders already created.
2. You cannot plan your trades in advance. One cannot always be in front of the screen ready to trade. If the market moves against your trading strategy while you sleep or you are not available, you will not be able to create a market order. On the other hand, you can use a limit or stop-limit order to plan ahead.
For more information on limit orders, see: What is a limit order?
For more information on stop-limit orders, see: What is a stop-limit order?
Conclusions
A market order offers the most basic method of buying and selling financial assets. It is the best option to enter or exit a market immediately. However, it has the disadvantage of losing the level of control that you can enjoy with other types of orders. Your best option is to evaluate the specific situation you are in, and understand when it is best to use a market order or another type of order.